Body blow for Hayek as ISS recommends activist investor for Swatch Group board

Institutional Shareholder Services (ISS), the world’s leading proxy advisory firm, has landed a blow to the Hayek family after formally recommending that The Swatch Group’s shareholders should vote for the activist investor who has been trying to rock the boat at board level.

This battle has been rumbling on for months, with the choice being between broadly the status quo, which is the Hayek family’s preference, and voting in Steven Wood from GreenWood Investors onto the board, who wants to shake up the corporate governance of the company.

Wood’s main gripe is that he sees the governance of the Swiss watch group as being dysfunctional and unbalanced because of how dominated it is by the Hayek family. The Hayek family controls the company through its ownership of registered shares, which are a fifth of the face value of bearer shares, but with equal voting rights. 

Wood believes that this family-centric control of the company encourages conservatism and resistance to open decision-making.

Now ISS has advised shareholders that it recommends the backing of Wood’s board nomination, as well as his governance proposals, ahead of the Group’s Annual Meeting of Shareholders, which will take place on May 12.

In a scathing report, ISS said: “Overall, given the company’s governance shortcomings and the clear need for a more independent, outside perspective at the board level, support for the dissident nominee is warranted. A vote FOR the dissident director [Steven Wood] represents a constructive step toward improving oversight and rebuilding investor trust.

“UHR [The Swatch Group AG] has lost its luster as a leading player in the luxury watch segment. The company went from accounting for more than 40% of Switzerland’s watch exports a decade ago, to less than 25% in the most recent reporting period. Revenue has declined to a decade-low level (excl. a 2020 dip due to the pandemic), operating margin is also at a multi-year low and the worst among peers, and TSR [Total Shareholder Return] has deteriorated.”

It believes that Wood’s nomination “would impart the perspective of an unaffiliated shareholder. This is most critical at this stage, as the board needs an unquestionably independent voice to counteract the influence of the expertise and public company board experience across multiple European jurisdictions, which would be valuable in helping to restore investor confidence and drive much-needed improvements in governance.

“It is difficult to separate the company’s issues with performance from its governance deficiencies. The sub-optimal governance setup is exemplified by the significant influence of the founding family and the lack of independence at the board level. Decision-making is concentrated within a small group of founding family members, and it appears that the remaining directors, who generally have limited industry experience and long tenures, have not been willing or able to effectively oversee management.”

In response to this news, Wood said: “We are extremely grateful to have received strong votes of confidence from ISS today, which has long pointed out governance deficiencies at Swatch. Our proposals and candidate represent necessary first steps to rectifying the governance shortcomings and finally addressing the stagnation that has occurred at the Company in recent years. However, for this to become a giant leap, we need shareholders to ensure they vote their shares.”