Swatch Governance Battle
The company has seen its profits collapse by 90% to $32 million
The Swatch Group is one of the world’s largest watchmakers, but the company has seen its profits collapse by 90% to $32 million compared to last year. The company’s value has also almost halved over the past decade, having been impacted on by a higher valued Swiss franc, a luxury downturn in China, and a weakening brand performance.
A big issue the company is currently facing internally is US investor Steven Wood suing the Hayek family for blocking him from joining the company’s board of directors. Steven Wood owns 55% of the company through shares, but has no say in how it is run. The Hayek family (CEO Nick and Chairman Nayla) only own 26% of the company through shares, but have special shares that give them 44% of voting power regarding company decisions.
Analysis
The dual-class share structure Swatch uses means a family can run the public company however it wants. Even when 80% of regular shareholders voted for Wood to join the board, the Hayek family simply rejected this. The Swiss pension fund group Ethos describes Swatch’s governance as being ‘among the worst structures’ in Switzerland.
This board structure is especially poor, as three of the eight company directors are family members, which means there is no room for fresh perspective and no one realistically willing to challenge the Hayek family’s decisions.
What does this sort of governance structure mean for investors?
- Families can retain control of companies in this way despite terrible financial performance, leaving smaller shareholders trapped
- Swiss law additionally allows controlling shareholders to block board nominees based on their nationality, preventing foreign investors like Steven Wood from ever getting representation
- Company committees that should be independently checking company management on matters like pay include family members that are essentially reviewing their own pay and performance
How to use this in applications
Litigation teams at law firms handle cases like Steven Wood’s lawsuit against Swatch, representing minority shareholders. This will involve analysing whether Swiss corporate law allows families to block board nominees despite them winning shareholder votes, whether nationality requirements for board directors is legal, and whether families like the Hayek family breach their duties to minority shareholders by ignoring their interests.
Corporate governance teams at law firms address how public companies with dual-class shares should treat minority shareholders. Law firms will advise the special shareholders on how to avoid shareholder revolts, litigation, or reputational damage. This involves advising on how the board should be composed and how much independence is needed.
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