Learning from the Swiss Corporate Governance Exception

Swiss corporate governance, which according to legal origin theory should belong to a civil law system, is characterized by diffused corporate ownership, weak labour protection, and radical innovation, which resemble the common law systems more than its neighbouring civil law countries, ie, Austria, France, Germany, and Italy. In my paper, forthcoming in Kyklos (and available here), I argue that the Swiss exception is the result of a long and composite path in which policies (especially, addressing labour protection and innovation) played a pivotal role.

Exploring the complementarity between corporate ownership and labour protection, I investigate the role of the 1937 Swiss ‘industrial peace agreement’ (Friedensabkommen in German) in the evolution of Swiss corporate governance. This agreement, which first applied to the metalworking industry and was initially accepted for two years, has been renewed at five-year intervals ever since and has been extended to almost all industrial sectors, becoming a cornerstone of Swiss industrial relations. This peace agreement produced three main results:

1. Because it was not based on legal requirements but on contractual provisions defined by parties, the current Swiss norms governing labour relations do not form a distinct labour code but are incorporated in the Code of Obligations alongside contracts.
2. Wages are, to a large extent, set at the individual firm’s level, leaving employers free to negotiate with their own workforce.
3. Finally, Switzerland has the lowest annual strike rates amongst OECD countries.

Given the non-conflictual, contract-based relationship between labour and capital in Switzerland, workers did not turn to national politics to obtain higher protections, and, therefore, there was no need to keep ownership concentrated so as to allow shareholders to defend their corporate quasi-rents. In other words, the Swiss industrial peace agreement, which had contributed to a low level of employment protections in Switzerland, has had a prominent role in allowing for diffused corporate ownership.

In this respect, the influence of politics is worth underlining. The political environment of neighbouring nations played an important role. The 1937 peace agreement stems from employer and employee representatives’ fears that the federal government might impose a sort of corporatism similar to what occurred in Nazi-Fascist nations, like Germany and Italy. Consequently, the threat of government intervention was an essential factor leading to the peace agreement. The strategy adopted by employer and employee representatives was aimed at obtaining mutual recognition without falling under state control. Employers and employee representatives feared that without an agreement, the government (encouraged by the Nazi-Fascism political movements), would impose direct controls and guild unions resembling the fascist model.

On the other hand, using the complementarity between corporate governance and innovation, I argue that the Swiss policies on intellectual property rights implemented at the end of the 19^th century contribute to explaining the Swiss exception. As noted by many authors, Switzerland had no patent legislation throughout most of the 19^th century. Before 1888, the year of the adoption of the first Swiss federal patent law, several attempts to introduce a patent system failed—Switzerland did not find it in its interest to enact a national patent system until Germany threatened the smaller neighbour with retaliatory tariff action. The Swiss case shows that it may be advantageous not to have a patent law, assuming that domestic inventive capabilities are sufficient to allow for the imitation of technologies developed by foreign enterprises. In this view, Swiss ‘radical’ industries, such as chemical and pharmaceutical ones, played an important political role in the opposition to patent protection, which incremental sectors, such as the watch-making industry, called for. Why? One reason derives from different features between radical and incremental innovation. Because incremental innovation relates to specific investments, the re-deployment in alternative uses of specific assets is very costly. Indeed, specific assets are locked-in into specific relationships. On the contrary, radical innovation relates with general or multi-purpose investments. This means that the re-deployment of assets is relatively simpler than in incremental innovation and also implies that radical technologies can be more easily imitated and imported from outside than incremental technology. Indeed, while the relocation of incremental innovation would require the relocation of a strict nexus of specific relationships, which in turn could involve many assets and agents, the relocation of radical innovation is relatively less reliant on specified, localized, and locked-in relationships, assets, and agents.

Accordingly, by this ‘institutional arbitrage’, several chemical, medical, and pharmaceutical firms moved to Switzerland, enjoying the possibility of freely working and trading resources that in other countries were protected by intellectual property law. Thus, lobbying by radical sectors aiming to freely imitating or importing foreign-patented technologies stimulated the growth of such sectors. Relatedly, Switzerland developed a flexible labour market that fit radical innovation and supported diffused corporate ownership that has differentiated the Swiss economy from its neighbouring countries’.

In conclusion, the Swiss exception is not the result of what happened in Switzerland, but rather of what did not happen. First, Switzerland escaped from the totalitarian regimes of the 1930s and WWII. This explains the low level of political rights of workers. Second, Switzerland passed through the 19^th century without a stringent patent regulation. This permitted the imitation and import of foreign technology, in particular, in radical sectors in which assets are relatively more flexible and less committed. Low protection of workers and radical sectors sustained (and were sustained by) a diffused corporate ownership. The Swiss case illustrates that the institutional differences and similarities across countries, which some explain with legal origins, can rather derive from additional politics-based specificities, namely the policies on employment protection and innovation.

Massimiliano Vatiero is a Senior Assistant Professor of Law and Economics at the Università della Svizzera italiana (Lugano, Switzerland), and a guest contributor to the Oxford Business Law Blog.