UBS - Corporate governance

Corporate governance – the way that the leadership and management of the firm are organized and how they operate in practice – ultimately aims at leading UBS to success, protecting the interests of its shareholders and creating value for them.

For a full description of corporate governance, see our Handbook 2006 / 2007.

Management structure

UBS operates under a strict dual Board structure, as mandated by Swiss banking law. The functions of Chairman of the Board of Directors (Chairman) and Group Chief Executive Officer (Group CEO) are assigned to two different people, thus providing separation of powers. This structure creates an institutional independence of the Board of Directors from the day-to-day management of the firm, for which responsibility is delegated to the Group Executive Board. No member of one Board may be a member of the other.

Board of Directors

The Board of Directors (BoD) is the key body that shareholders rely on for the ultimate direction of the firm and the effective supervision of management. It has ultimate responsibility for the mid- and long-term strategic direction of the Group, for appointments and dismissals at top management levels and the definition of the firm's risk principles and risk capacity.

UBS relies on a Board that combines the experience of former members of UBS senior management with the diverse skills of fully independent external members. While the majority of the Board members are always non-executive and independent, the Chairman and at least one Vice Chairman have executive roles in line with Swiss banking laws, and assume supervisory and leadership responsibilities.

Former UBS executives, with the experience and know-how of complex business activities and processes inherent to a modern global financial services provider, are often in a better position to challenge management decisions. Moreover, as they do not have any significant business commitments outside UBS or external directorships, they have the resources and time necessary to dedicate themselves to their comprehensive responsibilities as UBS Board members.

The executive members of the Board are complemented by a number of fully independent directors, who have the competence and expertise to deal with the wide range of global strategy and business issues that UBS faces. In selecting candidates, UBS also strives for an adequate balance of nationality, mirroring our global presence.

All the members of the BoD are elected individually by the Annual General Meeting for a term of office of three years. The Board itself then appoints its Chairman, the Vice Chairmen and the various Board Committees (Audit Committee, Compensation Committee, Nominating Committee and Corporate Responsibility Committee).

The CVs of the members of the Board of Directors as of 31 December 2006 are included on the following pages.

Group Executive Board

Only committed and effective executive teams can ensure that sustainable value is created for shareholders. The Group Executive Board (GEB) has business management responsibility for UBS and shares a common vision – to be the best global financial services company. Its members, and in particular the Group CEO, are responsible for the implementation and performance of the firm's business strategies, for the alignment of the Business Groups to UBS's integrated business model, and for the exploitation of synergies across the firm. They are accountable to the Board for the firm's results.

The GEB comprises the Group CEO, the CEOs of the three Business Groups as well as senior leaders representing major growth businesses and geographic markets. It also includes the heads of the key control functions at UBS – risk, finance and legal – reflecting their importance in the overall success of the firm. The different nationalities of its members also represent the fact that UBS is a truly global firm. Their experience is integral to their understanding and balancing of the different facets of the firm and its complex businesses. The members of the GEB (as of 31 December 2006) are shown before the 2006 results section of this Annual Review.

Compensation for senior executives

Principles

Two related principles govern our senior executive compensation programs (and, indeed, the compensation of all UBS employees): creation of shareholder value and pay for performance. The approval of senior executive compensation follows a rigorous process designed to ensure that no-one participates in any decision affecting his or her own compensation.

With a view to aligning the interests of its management with those of its shareholders, UBS strongly encourages significant levels of stock ownership on the part of its senior executives.

Total compensation for senior executives comprises four elements: base salary, incentive awards, stock option awards and benefits. UBS places a strong emphasis on the variable components of compensation, with the understanding that only superior performance will be rewarded with superior compensation. In 2006, base salaries for senior executives constituted, on average, some 6.5% of total compensation.

50% of the annual incentive award is granted in the form of mandatory deferred UBS shares. They normally vest in equal portions over a period of five years. Discretionary stock option awards reward the individual's contribution to the overall success of the firm and do not form part of the annual incentive award. Stock options help align executive performance with long-term shareholder interests, since they deliver value only to the degree the share price appreciates more than 10% after the grant.

2006 compensation for executive members of the Board of Directors and the Group Executive Board

Total compensation for the financial year 2006 (base salary, incentive awards, stock options, employer's contributions to retirement benefit plans, benefits in kind and fringe benefits) for the three executive members of the BoD, and the ten members of the GEB in charge as of 31 December 2006, was CHF 246,832,740. The increase of 10.9% over last year's compensation figures compares favorably with the increase in attributable profit from continuing operations of 18% (and 19% for the financial businesses). Total incentive awards for 2006 granted to senior executives represented 1.85% of the overall incentive awards distributed to UBS employees as a whole. The ratio of total compensation of all senior executives to UBS's net profit before tax in 2006 was 1.51% excluding stock options and amounted to 1.68% including stock options based on fair market value. The corresponding ratios in 2005 were 1.55% and 1.71%.

2006 compensation for non-executive members of the Board of Directors

Remuneration of non-executive directors is not dependent on the Group's financial performance.

They receive a base fee and additional retainers for Committee membership, commensurate with the workload associated. The nine non-executive members of the BoD were paid in aggregate CHF 5,938,753 in cash and restricted shares for the term between the 2006 and 2007 AGMs.

Shareholders' participation rights

UBS fully subscribes to the principle of equal treatment of all shareholders, ranging from large investment institutions to individual investors, and regularly informs them about the development of the company of which they are co-owners.

UBS places no restrictions on share ownership and voting rights. Nominee companies and trustees, who normally represent a great number of individual shareholders, may register an unlimited number of shares, but voting rights are limited to a maximum of 5% of outstanding UBS shares in order to avoid the risk of unknown shareholders with large stakes being entered into the share register.

All registered shareholders are invited to participate in shareholder meetings. If they do not wish to attend in person, they can issue instructions to accept, reject or abstain on each individual item on the meeting agenda by either giving instructions to an Independent Proxy designated by UBS (as required under Swiss company law) or by appointing UBS, another bank or another registered shareholder of their choice, to vote on their behalf.

The Annual General Meeting offers shareholders the opportunity to raise any questions regarding the development of the company and the events of the year under review. The members of the Board of Directors and Group Executive Board, as well as the internal and external auditors, are present to answer these questions. Shareholders individually or jointly representing shares with an aggregate par value of CHF 62,500 may submit proposals for matters to be placed on the agenda for consideration by the shareholders' meeting.

Audit

The Chairman's Office, the Audit Committee and ultimately the Board of Directors supervise the functioning of audit work. The Audit Committee, on behalf of the Board of Directors, monitors the qualification, independence and performance of the Group Auditors and their lead partners.

Ernst & Young Ltd., Basel, have been assigned the mandate to serve as global auditors for the UBS Group. They assume all auditing functions according to laws, regulatory requests, and the UBS Articles of Association.

Group Internal Audit provides an independent review of the effectiveness of UBS's system of internal controls and compliance with key rules and regulations. It has unrestricted access to all accounts, books and records and must be provided with all information and data needed to fulfill its auditing duties. To maximize its independence from management, the head of Group Internal Audit reports directly to the Chairman of the Board.

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