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Fortress Switzerland Is Strangling Growth


Bucolic, orderly Switzerland was never supposed to be like this. The shareholders meeting held on May 15 by Swiss travel giant Kuoni Reisen Holding looked more like a messy boxing match. Kuoni's vice-chairman, backed by a majority of the board in a bid to overthrow Chairman and CEO Daniel Affolter, sent in burly security guards to keep the company boss from taking his seat. In the end, Affolter was physically restrained as he tried to mount the podium, and was reduced to shouting. Now, the future of Kuoni's top management is murkier than ever, with Affolter claiming he is still legally CEO and the board insisting he's out. The dissident board claims Affolter and his wife illegally took money from the Kuoni family foundation--a charge Affolter denies. Lawsuits are flying, and another shareholder meeting is planned for early July to try and sort things out.

How un-Swiss. The Alpine confederation is home to sleekly run corporate giants like Nestl? (NSRGY), Novartis (NVS), and banking colossus UBS (UBS). But Nestl? and other paragons of corporate excellence are only half the picture.

The Kuoni case, along with similar examples of corporate strife at other companies, evince the dark side of Switzerland Inc. While the rest of Europe is moving toward more open corporate governance, the message doesn't seem to be getting across in Switzerland. "Swiss companies have a lot of devices" to protect entrenched management, says Marco Becht, head of the European Corporate Governance Network in Brussels. "You name it, they have it."

That system worked well in the past--maybe too well. For one thing, Swiss corporations traditionally enjoyed easy access to capital, thanks to low Swiss franc interest rates and the huge Swiss banks that plowed some of their fat earnings into the local economy. With cheap bank funds available, many companies didn't have to worry about boosting returns to the highest level. "The result is that many locally rooted companies are now having difficulties adjusting" to the global economy, says Winfried Ruigrok, professor of international management at Switzerland's prestigious University of St. Gallen.

That's the case with Sulzer Ltd., the conglomerate that dominates the eastern Swiss city of Winterthur. Management, backed by the Sulzer family and other local clans, has pursued a diversification strategy in which shareholder value wasn't a top priority. Not surprisingly, Sulzer's stock performance has been lackluster. The company's main jewel, its 74% stake in Sulzer Medica, Europe's leading orthopedic company, is highly profitable. But its thinly traded shares sold at barely 15 times earnings, much less than those of competitors. The mother company, with $3.3 billion in sales, was ripe for a takeover bid. Late last year, Zurich corporate raider Rene Braginsky started buying shares and recruiting support from U.S. institutional investors. But Braginsky was unable to overturn the company's share transfer and voting restrictions or persuade local Swiss institutional shareholders to join in the assault. By April, Braginsky was forced to give up. Sulzer shares have slumped 30% since.

It has been a similar story at Basel pharmaceutical giant Roche Group. Because of a complex two-tiered vote structure allowing the descendants of founder Fritz Hoffmann-La Roche to maintain majority control with just 10% of equity, Roche management successfully fought off Swiss financier Martin Ebner. Ebner and other shareholders had argued that the structure depressed the stock price. But by mid-May, Ebner gave up, selling his 20% Roche stake to rival Swiss drugmaker Novartis.

INCESTUOUS BOARDS. A major problem is the incestuous nature of the corporate community. Some Swiss sit on 15 or 20 corporate boards; one Zurich businessman sits on more than 40. It's what the Swiss call filz--literally "felt material"--meaning the interwoven connections of a small community. And under Swiss law, a majority of board members of Swiss-registered companies must be Swiss nationals and Swiss residents. The result, says St. Gallen's Ruigrok, is that "boards rarely ask the annoying questions that management needs to be asked."

That, ultimately, was a recipe for disaster at SAirGroup, the holding company for Swissair. Under Chairman and CEO Philippe Brugisser, the group embarked on an acquisition binge of stakes in second-tier European airlines, including Poland's LOT and Belgium's Sabena. It was a flawed strategy. But the board, composed mostly of political appointees and friends of Brugisser, never raised an eyebrow. By January, Brugisser was forced out--followed, three months later, by most of the board. Last April, it became clear just how close SAirGroup had come to going under when it reported a net 2000 loss of $1.7 billion.

Will the recent debacles force change on Switzerland? Some think so. "We are going to see a very strong movement now to be aware of the importance of corporate governance," predicts Gilbert Probst, head of the MBA program at the University of Geneva--and one of the dissident board members of Kuoni. Already, notes Probst, independent audit committees are starting to crop up within some Swiss companies. But others are less sure how quickly the Swiss will adjust their system. In a national referendum in early March, after all, more than 77% of Swiss voters voted down proposals to start talks to enter the European Union. That suggests a lot of Swiss like things just the way they are. By John Rossant in St. Gallen


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