Novartis shareholder revolt costs boss his $78m 'golden gag'

Swiss pharmaceuticals group cancels non-compete agreement with outgoing chairman Daniel Vasella after furious reaction

The Guardian, Shane Hickey, Tuesday 19 February 2013

Daniel Vasella had offered to give away some of the payment he was to receive
 to prevent him from giving advice to competitors after he steps down from the
Novartis board. Photograph: Pascal Lauener/Reuters

Shareholder activism over corporate pay has claimed one of its biggest victories yet after the Swiss pharmaceutical group Novartis was forced to abandon the award of a $78m "golden gag" non-compete payment to its outgoing chairman.

The UK investor advisory body, Pirc, said the move could inspire a repeat of last year's "shareholder spring" when a series of rebellions over pay forced out the chief executives of Aviva, AstraZeneca and Trinity Mirror.

Shareholders in Novartis reacted with fury over the weekend when it emerged that Daniel Vasella was to receive the payment – $13m a year over six years – to prevent him from giving advice to competitors after he steps down from the board this week. Vasella's attempt to deflect their anger by pledging to give some of the money away to philanthropic causes was unsuccessful, as investor anger became amplified by criticism from the Swiss public. On Tuesday, the company said the board of directors and Vasella had agreed to cancel the non-compete agreement in the light of the furious response.

"I have understood that many people in Switzerland find the amount of the compensation linked to the non-compete agreement unreasonably high, despite the fact I had announced my intention to make the net amount available for philanthropic activities. That is why I have recommended to the board that I forgo all payments linked to the non-compete agreement," Vasella said in a statement.

A spokesman for Pirc said the turnaround marked an important victory for shareholders in the UK. Pirc has recommended to its clients that they vote against every long-term bonus plan published this year. "Both the scale and the nature of the payment were clearly going to inflame investor and public opinion. Although the board has ultimately reached the right decision, this situation should never have arisen in the first place. As we gear up for the UK season, hopefully this victory will give shareholders here greater confidence that they, too, can successfully challenge inappropriate remuneration arrangements," the spokesman said.

The Novartis reversal comes as Switzerland prepares for its own equivalent of a shareholder spring, with a national referendum on 3 March to decide whether shareholders should wield a veto over excessive executive pay.

The backlash began among shareholders, the public and the business community last week when news of it emerged on a Swiss blog. On Monday, a criminal complaint was filed on behalf of shareholders against Vasella and the company's compensation committee for breach of trust and untruthful business information.

Roby Tschopp, head of shareholder group Actares, described the payment as an outrage.

In a statement on Tuesday, Novartis vice-chairman Ulrich Lehner said: "We continue to believe in the value of a non-compete; however, we believe the decision to cancel the agreement and all related compensation addresses the concerns of shareholders and other stakeholders. The board understands the importance of full transparency and will strengthen its efforts in this regard."

In the UK, Pirc's support was echoed by the Institute of Directors (IoD), which represents 37,000 company directors. It said the payment to Vasella had been difficult to justify and called on companies to pay attention to their shareholders.

"Such an exceptional payment could only be viewed as legitimate if it had the explicit support of shareholders – it evidently did not, and it is a good sign that they stood up and pressed their concerns home," said Roger Barker, head of corporate governance at the IoD. "Efforts to strengthen the role of shareholders in issues of executive pay in Switzerland are to be welcomed. Shareholder engagement with companies over key areas of governance, such as executive pay, is an important component of modern corporate governance and should be embraced by companies and boards."

Recent polls indicate that some 65% of voters in Switzerland are in favour of measures proposed in the forthcoming referendum which will ban "golden handshakes" for new staff and "golden parachutes" for those departing. If the proposals are successful, there will also be restrictions on the terms of board members to one year.

The main backer of the changes is Thomas Minder, a businessman who has campaigned against large-scale bonuses in Switzerland.

A growing backlash

The defeat of Daniel Vasella's $78m (£50.6m) non-compete agreement is the latest corporate pay reversal due to pressure from the public, shareholders and politicians. Here is a selection of other notable rebellions over executive pay.

Sir Bill Gammell Cairn Energy last year gave in to pressure from shareholders and dropped a plan to give the chairman and former chief executive a £3.5m reward package. The former Scottish rugby international had been due to receive a £2.5m share bonus and a £1m donation to charities of his choice after he completed the sale of a stake in the company's Indian assets.

Lord Hollick The former chief executive of United Business Media (UBM), then owner of the Express newspapers, announced in May 2005 that he would decline a controversial £250,000 bonus following investor disquiet.

While he had initially said he would take the money even after three-quarters of the company's shareholders voted against him, the Labour peer was reportedly shaken by some of the hostility shown to him.

Dick Grasso The former chairman of the New York Stock Exchange (NYSE) went from hero - for his swift reopening of the exchange following the September 11 attacks - to pariah in 2003 when he resigned amid outrage over his $140m pay deal.

However, after four years of litigation in what was described as one of the ugliest legal fights Wall Street has ever seen, a court ruled he could keep the amount he was paid.

Fred Goodwin The former chief executive of Royal Bank of Scotland bowed to public anger in 2009 when he agreed to give up more than £200,000 of his pension. When the size of his pension emerged, it sparked a row between the government and the Treasury select committee, which blamed ministers for standing by as Goodwin was allowed to retire with an enhanced pension in the middle of a government bailout.

In the wake of the furore, Goodwin agreed to be paid a pension of £342,500 a year, down from £555,000 previously.