Swatch activist lambasts Omega owner’s ‘worst-in-class’ governance – Financial Times

Report on Swatch Group’s Corporate Governance and Alignment with Sustainable Development Goals

Executive Summary

An analysis of recent shareholder activism at Swatch Group reveals significant corporate governance challenges that conflict with the principles of the United Nations Sustainable Development Goals (SDGs), particularly SDG 16 (Peace, Justice and Strong Institutions). Activist investor Greenwood Investors has proposed comprehensive reforms to address what it terms “worst-in-class governance,” aiming to enhance institutional accountability, transparency, and inclusive decision-making. These proposed changes are critical for the company’s long-term economic sustainability (SDG 8) and its alignment with global standards for responsible corporate conduct.

Governance Deficiencies and Economic Performance

Corporate Governance Structure and SDG 16

Swatch Group’s current governance framework presents a significant deviation from the principles of SDG 16, which calls for effective, accountable, and transparent institutions. Key issues include:

• Concentrated Control: The Hayek family, while owning a quarter of the company’s shares, controls 44% of the voting rights. This disproportionate power structure limits inclusive and participatory decision-making, a core tenet of SDG 16.7.
• Board Composition: Three of the seven board directors are members of the Hayek family, including the Chief Executive and the Chair. This raises concerns about board independence and its ability to provide effective oversight, which is fundamental to building strong institutions (SDG 16.6).
• Shareholder Disenfranchisement: Holders of bearer shares, who represent 55% of the company’s share capital, possess a minority of voting rights, effectively marginalizing a majority of capital providers from key governance processes.

Economic Performance and SDG 8

The governance structure’s impact is reflected in the company’s recent financial performance, which raises questions about its contribution to sustainable economic growth as outlined in SDG 8 (Decent Work and Economic Growth). The company’s share price is trading near lows last seen after the 2008 financial crisis. In the first half of the year, operating profit declined by two-thirds to SFr68mn, and revenue fell by 7.1% to SFr3.06bn. This performance indicates that the current governance model may be hindering the company’s ability to create sustainable, long-term value and foster economic resilience.

Proposed Reforms for SDG Alignment

Enhancing Institutional Accountability (SDG 16.6)

Greenwood Investors has formally submitted six proposals for the upcoming Annual General Meeting. These proposals are designed to build a more effective, accountable, and transparent institution in line with SDG 16.6.

1. Board Representation for Bearer Shareholders: Granting bearer shareholders the right to elect three board members to ensure more representative decision-making.
2. Mandatory Auditor Rotation: Introducing a mandatory rotation of auditors to enhance transparency and accountability.
3. Independent Compensation Committee Chair: Mandating a shareholder-elected independent chair for the board compensation committee to ensure fair and accountable remuneration practices.
4. (Additional proposals as part of the package aim to further strengthen independent oversight and shareholder rights.)

Promoting Inclusive and Representative Decision-Making (SDG 16.7)

The core of the proposed reforms is to rebalance the decision-making process to be more inclusive and representative, directly addressing SDG 16.7. By empowering bearer shareholders, who represent the majority of the company’s capital, the proposals seek to create a governance structure where decision-making is more participatory and reflects the interests of all stakeholders, not just the controlling family. This shift is essential for fostering trust and ensuring the company’s long-term social license to operate.

Stakeholder Positions and Path Forward

Investor Perspective on Sustainable Value

The activist investor, along with other supportive institutional investors, argues that improving governance is fundamental to unlocking sustainable value. This perspective aligns with the broader movement towards responsible investment, where strong governance is seen as a prerequisite for achieving both financial returns and positive contributions to the SDGs. The investor’s shift from seeking a single board seat to demanding systemic reform underscores the depth of the perceived governance failures.

Swatch Group’s Position

Swatch Group’s board previously recommended shareholders vote against the investor’s board candidacy, citing non-residency, and has noted that it is awaiting legal verification for the new proposals. This stance highlights a potential resistance to evolving governance practices in line with global standards and the principles of the SDGs. For Swatch Group to secure its future and contribute positively to sustainable development, it must address these governance concerns and embrace a more transparent, accountable, and inclusive institutional framework.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article primarily addresses issues related to corporate governance, shareholder rights, and economic performance, which connect to several Sustainable Development Goals (SDGs).

• SDG 8: Decent Work and Economic Growth: The article highlights Swatch’s poor financial performance, including a slump in operating profit, a fall in revenue, and a low share price. The activist investor’s push for governance reform is aimed at unlocking value and improving the company’s economic stability and growth, which is central to SDG 8.
• SDG 16: Peace, Justice and Strong Institutions: This is the most directly relevant SDG. The core of the article is a critique of Swatch Group’s corporate governance, which the investor calls “worst-in-class.” The proposals for board reform, shareholder representation, and auditor rotation are all aimed at creating more effective, accountable, and transparent institutions at the corporate level, aligning directly with the principles of SDG 16.
• SDG 10: Reduced Inequalities: The article describes a significant inequality in power within the company’s structure. It states that “Holders of so-called bearer shares represent 55 per cent of Swatch’s share capital but carry a minority of voting rights,” while the controlling Hayek family “owns a quarter of Swatch’s shares but controls 44 per cent of the voting rights.” The effort to give bearer shareholders more representation is a direct attempt to reduce this inequality.
• SDG 5: Gender Equality: While not the main focus, the article mentions that the board is chaired by Nayla Hayek. The broader call for a “total change” on the board and more representative governance structures relates to ensuring equal opportunities for leadership in economic life, which is a key aspect of SDG 5. The push for an independent and diverse board could impact female representation.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the issues discussed, the following specific SDG targets can be identified:

1. Target 16.6: Develop effective, accountable and transparent institutions at all levels.
   • The entire premise of the activist investor’s campaign is to reform what is described as “worst-in-class governance.” Specific proposals, such as introducing a “mandatory rotation of auditors” and a “shareholder-elected independent chair for the board compensation committee,” are direct measures to increase accountability and transparency within Swatch Group.
2. Target 16.7: Ensure responsive, inclusive, participatory and representative decision-making at all levels.
   • The proposal to give “bearer shareholders… the right to elect three board members” directly addresses this target. It aims to make the board more representative of the shareholders who provide the majority of the company’s capital but currently have a minority of voting rights, thus making decision-making more inclusive and participatory.
3. Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading and innovation.
   • The investor’s actions are motivated by the company’s poor performance, including an operating profit that “slumped by two-thirds” and shares “trading near lows.” The goal of the governance improvements is to “unlock much more value,” which aligns with the objective of increasing economic productivity and performance.
4. Target 10.4: Adopt policies… and progressively achieve greater equality.
   • The conflict over voting rights is a clear example of inequality. The investor’s proposals aim to reform the corporate policies that allow a family with 25% of shares to control 44% of votes, while shareholders with 55% of the capital have a minority say. This is a direct effort to adopt policies that achieve greater equality among shareholders.
5. Target 5.5: Ensure women’s full and effective participation and equal opportunities for leadership at all levels of decision-making in… economic… life.
   • The article notes that Nayla Hayek has chaired the board since 2010. The call for a “total change” on the board, which currently has three family members out of seven directors, opens up a discussion about board composition and the opportunity for more diverse and independent leadership, which includes equal opportunities for women.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article mentions or implies several quantitative and qualitative indicators that can be used to measure progress.

• Indicators for Targets 16.6 & 16.7 (Strong Institutions):
  • Proportion of independent directors on the board: The article implies this is low by stating “Three of Swatch’s seven board directors are Hayek family members.” An increase in the number of non-family, independently elected directors would be a key indicator of progress.
  • Shareholder voting power disparity: The ratio of voting rights to share capital is an explicit indicator. The article provides the data: the Hayek family has a 1.76 ratio (44% votes / 25% shares), while bearer shareholders have a ratio below 1. Progress would be measured by a move towards a more equitable “one share, one vote” structure.
  • Existence of specific governance policies: The article mentions the lack of policies for “mandatory rotation of auditors” and a “shareholder-elected independent chair for the board compensation committee.” The adoption of these policies would be a clear indicator of improved governance.
• Indicators for Target 8.2 (Economic Growth):
  • Operating Profit and Revenue Growth: The article explicitly uses these as indicators of poor performance, noting that in the first half of the year, “operating profit slumped by two-thirds to SFr68mn and revenue fell 7.1 per cent to SFr3.06bn.” Improvement in these financial metrics would indicate progress.
  • Share Price Performance: The article states that “Swatch shares have risen by 3 per cent this year, they are still trading near lows.” The share price is a direct, measurable indicator of the value the market perceives, and a sustained increase would signal success.

4. Summary Table of SDGs, Targets, and Indicators

Source: ft.com