Novartis Is A Classic Case Of A Company Where Executive Compensation Is Misaligned With Shareholders' Interests

By John Vizikas, Research Analyst

On Friday, Daniel Vasella’s chairmanship at Swiss drug maker Novartis ended with the conclusion of the company’s annual general meeting. Vasella’s tenure ended amid a rash of shareholder criticism regarding the now infamous “Vasella Golden Handshake,” which came to light only a week before the AGM.

Under the now-cancelled non-compete agreement, Novartis would pay Dr. Vasella 72 million Swiss francs ($77 million) over a period of six years for consulting services to the company while prohibiting him from working for any competitor.

During a nationally televised live broadcast, a contrite Dr. Vasella admitted in front of enraged shareholders and the Swiss nation that it was a mistake to have negotiated such a deal in the first place. He also said that he was wrong to have believed that shareholders would give him the benefit of the doubt, since he had announced that most of the money would be used for philanthropic purposes.

Heightening the drama is a Swiss referendum to be held on March 3 that, if passed, would give shareholders more power in determining executive pay and would require companies to be more transparent about their pay practices.

While the general public and many shareholders were surprised that such an agreement between Novartis and Dr. Vasella could ever come into existence, GMI Ratings has emphasised for years that executive compensation at Novartis has been and continues to be misaligned with shareholders’ interests.

Not only does GMI currently give Novartis a below-average “D” rating for its pay practices, but, as early as 2008, GMI reported that Swiss activist investor group Ethos was pressuring major Swiss corporations, including Novartis, to align executive compensation more closely with shareholders’ interests.

At the 2009 AGM, Ethos called on Novartis shareholders to actively support its resolution requesting an advisory vote of the remuneration report. The resolution was defeated at the AGM amid stiff opposition by the Novartis board, but it managed to receive over 31% of ‘yes’ votes. Eventually the company decided to introduce a “say-on-pay” vote at the 2011 AGM after a board-supported resolution calling for say-on-pay was approved at the 2010 AGM.

Even though the adoption of say-on-pay was a move in the right direction, Novartis continued to demonstrate that its executive pay was out of step with shareholders’ interests and expectations. In 2011, GMI flagged Novartis for Remuneration after 38.3% of votes were cast against approval of the company’s compensation system at the 2011 AGM.

Opposition to Novartis’ compensation practices was once again headed by Ethos, which stated that not only was executive pay not aligned with shareholders’ interests since “the variable remuneration of executive management is too high compared to the fixed remuneration,” but also that “the various incentive plans are not described in sufficient detail to allow the establishment of a clear link between remuneration received and achievement of pre-defined performance targets.”

In our view, Novartis has had a history of sub-par disclosure and remuneration practices even before the Vasella Golden Handshake outraged an entire nation. It remains to be seen if Novartis can become both more transparent about its pay practices and more responsive to shareholder demands. Unfortunately, the first signs are not encouraging. On Sunday, Swiss publication “Der Sonntag” reported that Novartis was exploring whether or not the company should file criminal charges against the leaker of Novartis’ secret bank account for violating Swiss bank secrecy law. After all, disclosure of the account forced the company to reveal details regarding Dr. Vasella’s non-compete clause. Nevertheless, it is now a certainty that the referendum will indeed pass.

The post Novartis: Vasella Golden Handshake No Surprise appeared first on GMI Ratings.

Read more posts on GMI Ratings ┬╗

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.