It was supposed to be another megadeal, no questions asked. On Sept. 1, Fiat, Pirelli, and all-powerful Mediobanca announced that Gemina, an investment company under their control, would acquire the assets of the collapsed Ferruzzi empire. Overnight, Gemina would become Italy's No. 2 conglomerate--with the Agnellis and other magnates calling the shots.

Yet, for once, questions were asked. Minority shareholders, fund managers, and financial analysts are erupting over the Gemina deal, charging inadequate disclosure and backroom manipulation. "At this point, we've been reduced to spectators," gripes Stefano Pizza-miglio, a fund manager at investment company Finanza & Futuro Holding, which owns 3.4% of Gemina.

Europe's fat cats better get used to a permanent increase in the noise level. Their days of cozy dealings could be coming to an end as investors raise their voices. Shareholder activists are pushing companies to boost profits and dividends, oust poor management, and scrap executive-pay plans not tied to performance. They're setting up shareholder-defense committees, fighting for their rights in court, and seeking basic securities-law changes. Even Europe's holding companies, famous for their love of entrenched management, are urging companies in their portfolios to boost returns.

Corporate Europe needs the wake-up call. Minority shareholders have few rights. Assets are trapped in underperforming companies. Hostile takeovers are almost impossible. Company reports are often opaque, if not misleading. And voting rights are stacked in favor of incumbent executives who sleep easily knowing that large blocks of their companies' shares are in friendly hands.

Yet activists can already claim a growing list of victims: Compagnie de Suez Chairman Gerard Worms, booted out in July. Marc Fournier, Navigation Mixte founder and chairman for 26 years, axed in June. Europe's latest parlor game is guessing which chieftain will come under attack next. Emboldened shareholder activists are sharpening their knives for some of the most powerful barons of all, including Deutsche Bank CEO Hilmar Kopper, Mediobanca Chairman Enrico Cuccia, Banque Nationale de Paris' Michel Pebereau, and British Telecommunications Chairman Iain Vallance.

The movement is young. And so far, it has seen more defeats than victories. But if present trends continue, the shareholder revolt will change the balance of power in Corporate Europe. One reason is the need to please a powerful new class of investors. No longer can governments and domestic institutions satisfy European companies' capital demands. Instead, companies are holding their tin cups out to such pension funds as the California Public Employees' Retirement System (CalPERS), which just voted to increase from $11 billion to $18 billion the amount it invests in European equities.

Of some $500 billion in stock issued by Europe's newly privatized companies, about 20% went to U.S. institutions, which demand more transparency and better returns than most European companies have ever been subject to. Privatization has also created a small army of domestic investors, many of whom are learning to band together or to enlist the aid of shareholder activists. The result will not be a wholesale adoption of the U.S. system. But more companies will allow independent outsiders to sit on boards and question management decisions. They also will be under pressure to more openly disclose operating results, strategic goals, and even their mistakes.

The battle has recently been hottest in France. Over the past decade, France has evolved from a dirigiste, state-dominated system to a capitalist halfway house. The biggest companies continue to hold major stakes in one another, and a small cadre of executives dominates the system at the top, many pledging not to interfere in each other's businesses. With few pension funds and mutual funds in France to buy shares in privatized companies, the government has sold key stakes in former state companies to industrial holding companies to keep these assets in French hands.

NO VISION. Now, this cozy system is unraveling. In June, banking giant Compagnie Financire de Paribas, insurer Allianz, and other shareholders ousted the management of Navigation Mixte, an unwieldy $3.1 billion holding company with interests ranging from aircraft to perfumes to orange groves, because they believed founder and longtime Chairman Fournier had no strategic vision. "We couldn't get any indication from Fournier as to where the company was going," complains Paribas Chairman Andre Levy-Lang. "We were not satisfied with the status quo."

An even more monumental revolt followed at Suez, the giant of French holding companies. Chairman Worms was forced out for failing to give shareholders an adequate return on their investment, an argument rarely heard in a country where directors don't have a legally binding fidiciary duty to protect investors. Other motives may have been at play. Observers believe that BNP Chairman Pebereau, who led the attack, most likely was eyeing Suez's Banque Indosuez, an investment bank with a valuable Asian franchise.

Ironically Pebereau may be the next target. Some insiders think another reason he was eager to get his hands on Suez was that the merger would distract attention from BNP's own troubles, including poor profitability, problems with real estate holdings, and a languishing share price since the bank's privatization. Foreign fund managers are already complaining.

In the end, what's important is that cracks are opening in the noyau dur, or hard core, of stable shareholders that protects French managers from the ravages of market forces. Now, France's business chieftains are on notice that they, too, must watch their companies' performance or suffer the fate of Fournier and Worms. Paribas' Levy-Lang is concerned. "I'm not satisfied and neither are my shareholders, because the share price is too low and our earnings are, too. The message we're getting is that we need more focus," he says.

Like France, Germany is debating not whether to change, but how much and how fast. Yet its minority shareholders can be legally treated as second-class citizens, such as when the Marz Group, the country's second-largest brewer, sold off a Hamburg brewery late last year. Marz Group got $528 per share. But minority holders got only $396 a share, based on an accountant's report that shares were worth 25% less.

Germany's corporate boards are also under attack. At one level is the supervisory board, made up of business, bank, and union representatives. They appoint the chief executive, vet his executive nominations, and are supposed to scrutinize strategy. But they meet only once a quarter and are dependent on information fed to them by the second tier, the management board. Critics find the system too lax and blame it for spectacular scandals, including Metallgesellschaft's oil-derivatives losses, which required a $2.5 billion bank bailout.

HOT SEAT. Many fingers point at Germany's most powerful institution, Deutsche Bank, for its failure to detect the problem. Deutsche Bank was Metallgesellschaft's largest creditor, and the bank's corporate-finance chief, Ronaldo H. Schmitz, chaired MG's supervisory board. More recently, Deutsche Bank has also been in the hot seat over a string of fiascos at Daimler Benz.

In late June, Daimler warned of severe losses for 1995, just four weeks after predicting a rosy future at an annual meeting. The strong mark is partly to blame, but some believe Daimler's problems go to the heart of the corporate-governance system. "It's all one big ingrown club, a classic old-boy network," says University of Chicago Graduate School of Business Professor Merton H. Miller, who has studied the German model. "You cover up for one another. There's no one to say `you blew it,' and you never have to admit your mistakes."

No doubt, Deutsche Bank's hold on Germany Inc. is tight. Its board members have seats on more than 100 large companies in which it holds stakes, including 24% of Daimler, the country's largest company. Deutsche Bank CEO Kopper chairs Daimler's supervisory board and sits on seven other boards as well. Critics allege he can't possibly have the time to do each job well. Moreover, of the 20 executives on Daimler's supervisory board, only two have experience running a major manufacturer.

Even though Deutsche Bank failed to prevent Daimler's missteps, its attitude toward governance issues is undergoing a sea change. It has reduced its Daimler stake, from 28% to 24.4%, and says it plans to scale back holdings in other companies as well. Its mutual-fund arm, with $77 billion invested, now sends representatives to speak at the annual meetings of BASF, Hoechst, and a dozen others to push for better returns.

In Britain, which led Europe in agitating for shareholder rights, activists are homing in on new targets. Among the big issues are pay packages and option plans executives are rewarding themselves. High on the hit list: the generous bonus of British Telecom's Vallance.

In Italy, by contrast, change is far slower than in the North. Total stock market capitalization amounts to just 18% of gross national product, compared with 130% in Britain. Despite the rising assertiveness of outside shareholders and fund managers, it will take longer to crack the iron grip that the state and a small clique of powerful industrial heads have on most of Italian industry. The system leaves the stock market undeveloped and minority shareholders powerless.

A key obstacle to reform is the secretive merchant bank Mediobanca and its 87-year-old Chairman Cuccia. Mediobanca is the hub of Northern Italy's industrial dynasties and the driving force of the private sector. It has stakes in many blue-chip Italian companies, and they in turn have stakes in Mediobanca. The web of interlocking shareholders acts in concert when choosing boards and voting on management decisions, such as Gemina's takeover of Ferruzzi, which affects 30% of all shares traded on Milan's stock exchange.

FUTURE BLOCK. Critics allege that by grabbing shares of newly privatized banks and installing its own managers, Mediobanca is preventing Italy from reaping the benefits of privatization. In July, Italian antitrust authorities launched a probe into whether Mediobanca is hindering competition. Mediobanca would not comment.

Clearly, Europe is only in the early stages of what will be a long campaign to bring its corporate oversight up to the expectations of global investors. That may mean taking painful steps, such as changing accounting practices, laying off workers, and moving production outside of the country.

It will also mean revealing treasured secrets, as Jerome Monod, chairman of France's Lyonnaise des Eaux has decided to do. With 28% of his shareholders outside France, Monod announced on Sept. 4 that he will publish his salary and stock options in the company's annual report beginning next spring. That a leading French executive has taken such a step proves that Europe's shareholder revolt is far more than a fleeting trend. It is penetrating the inner sanctums of Europe's corporations.

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