Klaus Kaldemorgen didn't mince words when he rose to address the annual shareholders' meeting of German insurer Allianz on Apr. 29. Kaldemorgen is a fund manager at DWS Investments, a Frankfurt mutual-fund group that holds 2.8% of Allianz. Over the past year, the value of its stake had plunged 75% as the insurer's disastrous 2001 acquisition of Dresdner Bank led to a $1.3 billion loss in 2002. Allianz Chief Executive Henning Schulte-Noelle, the architect of the Dresdner deal, had agreed to step down. So why on earth, Kaldemorgen wanted to know, was Allianz proposing to name the discredited CEO chairman of its supervisory board? "We need a fresh start, and that should be reflected on the board," he fumed.

In the end, Schulte-Noelle won his board seat. But outspoken European fund managers such as Kaldemorgen aren't going away. Increasingly, they're speaking out at shareholder meetings, rallying fellow investors in proxy battles, and pressuring corporate management to improve transparency and accountability. The London-based International Corporate Governance Network, which includes big European pension funds such as ABP of the Netherlands and the BT fund in Britain, has even suggested punishing fund managers who don't ride herd on the companies they invest in. "The time has come for institutional investors to recognize the fiduciary responsibility they have," says Geert Raaijmakers, ABP's senior legal counsel.

If they mobilize, Europe's institutional investors could be a powerful force for corporate reform. Yet until recently, most European pension and mutual funds have been somnolent on corporate-governance issues. Unlike the U.S. or Britain, most publicly listed companies on the Continent are dominated by one shareholder who holds over 40% of outstanding shares. Many European companies also hold sizable chunks of each others' stock, further reducing maneuvering room for minority shareholders. Yet increasingly, fund managers are finding ways to assert their influence. DWS, an affiliate of Deutsche Bank, and other funds successfully lobbied the management of Paris-based Vivendi Universal last year to rescind restrictions on shareholder voting rights that the company had implemented in 2001. Hermes Focus Asset Management Europe, a London fund that invests in underperforming Continental companies, recently persuaded Italy's Banca Popolare di Milano to reserve four board seats for minority shareholders. "Before we go into a proxy fight, we try to exhaust all other ways of getting to a sensible solution. We call it shareholder engagement, trying to build consensus," says Stephan Howaldt, who manages the $390 million Hermes fund. Persuasion or confrontation. Whatever it takes.

By Carol Matlack in Paris, with bureau reports

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