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