Via the BBC:

Swiss voters have overwhelmingly backed proposals to impose some of the world’s strictest controls on executive pay, final referendum results show.

The measure has two important strands: shareholders will have a veto on executive remuneration and golden hellos and goodbyes will be banned. The former is a sensible, pro-market reform, the latter is not. Both are a response to what has gone wrong with capitalism.

It is entirely right that the owners of firms should control the actions and remuneration of employees, including directors. It’s what happens in privately-held firms and it should be available in listed firms too. Property ought to be the unity of ownership, control and risk if free markets are to function well. Just look at the behaviour of banks and their bailouts to know what damage is possible when ownership, control and risk, especially commercial risk, are separated.

However, control over property ought to include being able to incentivise your employees as you see fit. That’s why banning golden hellos and goodbyes and capping bonuses is a bad idea. Capping bonuses is reasonable in bailed-out, state-owned banks and that’s what the shareholders – governments – ought to do. It ought not to be necessary to explicitly ban or cap bonuses for all.


  1. Why is government intervention required here at all?

    Shareholders are surely already free, within existing corporate structures, to control how their company is run. They have chosen (foolishly, in many cases) to delegate too much control to the managers of the business, but presumably they could take this control back.

    Does the proposed legislation override existing contracts freely made between executives and the company (i.e. the shareholders)? If so, that’s an affront to the rule of law.

    • You’d have to ask someone familiar with Swiss law. I’m writing about the principle and the fact is that the limited liability corporation is a creature of the legislature, not private contract. It is reasonable for the law to be amended to give owners greater rights over the deployment of their property.

      I recall work has been done to show that limited liability joint stock companies could emerge from private contract but that is not the position today. I also understand that the reason for legislation in this area was originally to protect investors from executives…

  2. The central issue, well understood by academia, but just inchoately grasped at by the rest of us, is the Principal-Agent problem.

    If you have a vast group of shareholders, each with a relatively small number of shares, then the capacity of those shareholders to act in their own interests is extremely limited. Few have sufficient economic incentives to act against the self interest of management. Few have the information to understand exactly how management is acting in order to determine whether it is self-interested or not.

    So when pension funds and insurance companies (the big shareholders in most listed firms) sit on their hands, then management can get away with extraordinary self-interest. Consciously on occasion. Often unconsciously.

    So the principle that ownership gives control works far more effectively in tightly controlled shareholdings. Large listed entities are given more latitude, thanks to the dilution of control that dispersion of capital provides. WIthout that dispersion, few firms would enjoy the capital raising opportunities they enjoy today: they would be smaller. With it, they are larger and more or less impossible for shareholders, at least those with today’s norms, sensitivities and legal liabilities, to control.

    I raise it not because I disagree with your suggestion Steve. Just that the Swiss seem to have reversed the usual arrangements: management must submit to a shareholder vote a range of measures in which the Principal-Agent problem is most commonly observed.

    Is this sensible? What would be the impact on the UK economy if such arrangements were imposed here?



  3. The Crest system whereby the small shareholders holdings are held by nominees has deprived the shareholder of his/her voice. The shareholder is never asked about his preferences re AGMs and I would surmise that the nominee holders never exercise the vote.