Swiss banking giant UBS faces a turbulent shareholder meeting as activist investors prepare to reject the bank's bonus scheme, as well as plans to discharge former executives from responsibilities in the credit crisis.

Shareholders of UBS will gather on Wednesday in Basel for their annual general meeting.

In the line of fire are former chairmen Marcel Ospel, blamed for fostering UBS's decade-long U.S. expansion and the risky investment bets that came with it, and Peter Kurer, who took the baton from Ospel in 2008 but left a year later after record losses and in the midst of a U.S. tax probe against the bank.

New Chief Executive Oswald Gruebel and Chairman Kaspar Villiger, brought in early in 2009 to rebuild the battered Swiss franchise, are also at the center of potential attacks from investors led by activist Swiss foundation Ethos, which says the loss-making bank should not have paid such high bonuses.

While acknowledging that progress has been achieved toward restoring the bank's financial health, Ethos questions the rationale of paying such high variable remuneration, Ethos, which is an investor in UBS with less than 1 percent of shares but has 84 Swiss pension funds among its members, said in a proxy analysis to the vote.

UBS posted an annual consolidated loss of 2.7 billion Swiss francs ($2.52 billion) in 2009 but distributed bonuses of 54.8 million to its 12 management board members. Gruebel has declined to take his 2009 bonus.

Ethos said that Carsten Kengeter, hired by Gruebel as co-head of UBS's investment bank, was the highest-paid manager, thanks to a total remuneration of 13.9 million Swiss francs, 95 percent of which is variable pay. This is against Ethos's corporate governance recommendation that variable compensation should not exceed 50 percent of total remuneration.

The foundation also criticized UBS's payment of a total of 39 million Swiss francs in 2009 to remove several top executives involved in decisions which exacerbated the bank's exposure to the credit crisis, from former CEO Marcel Rohner to former head of investment banking Jerker Johansson.

COMING CLEAN?

Ethos's chief Dominique Biedermann believes that key Swiss pension funds will follow his recommendations, in particular on rejecting a UBS board proposal clearing top executives of all responsibilities in managing the company in 2007, the year that led to UBS's near-collapse of 2008.

To date, we have not yet heard of one single pension fund that is in favor of dismissing responsibilities for 2007, Biedermann said in an interview with newspaper NZZ am Sonntag.

Large corporate governance advisors ISS and Glass Lewis are of the same opinion. ISS alone can muster the support of 25 percent of votes. I think there is a very good chance that the discharge for 2007 will be rejected.

But Swiss institutional investors control nearly a quarter of UBS shares and large foreign institutions may not be inclined to put more pressure on UBS management at a time when Gruebel needs to focus on the bank's turnaround, analysts say.

Crucial to the vote may be the analysis of leading corporate governance expert RiskMetrics, also known as ISS.

Biedermann said in the NZZ interview that ISS has also recommended voting against the new UBS bonus system.

But the group is not advising investors to vote against the discharge of board members in 2008 and 2009 to avoid stirring the waters at a difficult time.

A spokeswoman for RiskMetrics declined to comment on the content of the proxy vote analysis on UBS.

(Editing by Rupert Winchester)