Novartis AG (NVS)

AGM proposals for dividend rise and consultative vote on Compensation System to further strengthen governance in the wake of the global financial crisis, and against the mandatory separation of the responsibilities of Chairman and CEO

The Board proposes a dividend payment of CHF 2.10 per share for 2009, up 5% from CHF 2.00 per share for 2008 and representing the 13th consecutive dividend increase since the creation of Novartis in December 1996. The average annual dividend increased by 11.7% in CHF, while the annual total shareholder return since 1996 increased by 9%. Dividends paid for 2009 on outstanding shares will amount to USD 4.6 billion and the payout ratio is estimated at 55% of net income. Based on the year-end 2009 share price of CHF 56.50, the dividend yield is 3.7%. The payment date is March 5, 2010. All issued shares are dividend bearing, except 167.7 million treasury shares.

The Board further proposes that Novartis become the first large, listed Swiss company to include a consultative vote on its Compensation System in its Articles of Incorporation. Such a vote is to be held before every significant change in the Compensation System, but at least at every third Annual General Meeting (AGM). The three-year cycle for votes also allows shareholders to take a longer-term view when examining the sustainability of the Compensation System. Sustainable compensation systems are harmonized with multi-year business plans, and only attain their full effect when used unchanged for several years, in part since it takes time for them to be understood by employees. This proposal, if approved by shareholders, would be implemented following the upcoming AGM. The proposal complements the corporate governance initiatives that Novartis has instituted over the past year. In 2009 a new Risk Committee of the Board was established that oversees enterprise risk management processes for the Group while monitoring risk-adjusted decision-making. In addition, a “clawback provision” for incentive payments will be progressively included in employee contracts. This will allow Novartis to retract any unjustified payment to an employee if later it is found to be based on financial misstatements or unethical business behavior. This will further enhance Novartis’ governance in the wake of the global financial crisis, which revealed among some companies a lack of standards and oversight which eventually contributed to the worldwide recession.

The Board recommends to shareholders to vote against the proposal by a shareholder group to introduce a yearly separate consultative vote on the Compensation Report, stating that such a vote is retrospective as it relates only to the previous business year. This vote would not allow a true consultation since shareholders would only express their views on matters that had already occurred. Shareholders also do not have the essential basis for an informed opinion on compensation awarded, as this implies knowledge of the pre-agreed objectives and the degree to which these objectives have been met. For competitive reasons it would be against the interest of the corporation to disclose yearly and long-term objectives and individual performance assessments. Setting the compensation of executives is an essential management instrument of the Board that may not be rescinded. Swiss company law mandates that this duty must be allocated to the Board.

The Board also recommends to shareholders to vote against a mandatory separation of the Chairman of the Board and CEO functions, regarding such a rule as too rigid and not in the best interests of shareholders, as it would restrict freedom and prevent the flexible adaptation of the Group’s leadership structure to circumstances and strategic requirements. Novartis has long complied with international best practice based on the Board’s decision to combine the roles of Chairman and CEO with the appointments of a Lead Director and only Independent Directors for the most important Board Committees.

Finally, the Board proposes the re-election of Dr. Daniel Vasella and Marjorie M.T. Yang, each for a three-year term, and Hans-Joerg Rudloff for a one-year term (as he will reach the age limit).

Shareholders will vote on these and other proposals at the next Annual General Meeting scheduled for February 26, 2010.

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