Those Mousy European Investors Begin To RoarRichard A. Melcher
Listening to your major shareholders is an axiom in American corporations. But for German executive Horst W. Urban, it's a lesson he'll never forget. On May 9, Urban was forced out as CEO of German tiremaker Continental after blocking merger talks with Italian rival Pirelli. His ouster was engineered by powerful Deutsche Bank, which was miffed that Urban's stalling was hurting Continental's investors. For European managers, the shakeup at Conti heralds a trend that could shape their lives in the 1990s. Shareholders large and small are beginning to clamor for greater influence in the executive suite. From Mannheim to Milan, such buzzwords as shareholder rights and corporate governance are gaining resonance. And led by Britain, CEOs who fail to perform are being forced out(table). "The recession has exposed the weaknesses, and managers can't be expected to be bailed out," warns Anthony R. Good, research director at the $34 billion Norwich Union Fund Managers.
Those are chilling words for most European executives, long shielded inside corporate cocoons. Anti-takeover devices, for example, restrict any one shareholder, no matter how large the holding, from voting more than a small part of the outstanding stock. Managers are further cushioned by intricate webs of banking and family ties. That's all changing quickly. With the recession hammering away, institutional investors are taking a more ruthless approach to the managers of the companies whose stocks they own. They are insisting on more outside directors, checks on executive pay, a say in company strategy, and the power to dump laggard managers.
ON THE RUN. The biggest surprises are in Germany, where the cozy relations between the corporate Establishment and powerful banks are being challenged. The campaign has been led by the German Shareholders' Protection Assn., a group that has lobbied successfully to let shareholders vote a larger portion of their stock. The upstart group has won important victories at such German heavies as Continental, Veba, Deutsche Babcock, and even Deutsche Bank.
There are signs that big state-controlled French institutions are eager to stir things up, too. In a power play, insurer Union des Assurances de Paris and other shareholders unseated Michel Francois-Poncet as chairman of powerful merchant bank Compagnie Financiere de Paribas. Francois-Poncet's misstep: his botched raid on Compagnie de Navigation Mixte. After paying $1.3 billion for a 40% stake, his takeover drive stalled when Mixte retaliated by buying Paribas shares. Under pressure from shareholders, Paribas is reducing its holdings in Mixte.
But the action on the Continent pales in comparison to the muscle-flexing by British shareholders. For years, Britain's large, bustling public market has put influence in the hands of shareholders. Now, the British government wants to go even further. Corporate Affairs Minister John Redwood argues strongly for more "truly independent" outside directors, who should be put forward by institutions. In late April, the Institutional Shareholders' Committee, representing major pension funds and insurance companies, recommended that British corporations adopt the U. S. practice of having outside directors determine executive pay. The whole debate on corporate governance "will be one of the biggest issues of the '90s," predicts John Kay, director of London Business School's Center for Business Studies.
EARLY RETIREMENTS. Already, British shareholders are making their moves. On the day after Urban got the boot in Germany, investors and banks, worried about a big runup in corporate debt, forced out Derek Lewis, the CEO of Granada Group PLC, a media, computer services, and gaming company. Financial sources say it was agreed that in exchange for Lewis' departure, the company would get a favorable reception for a new issue of $280 million in equity. In another case, banks and institutions are pushing ahead with a shakeup and asset sales at Brent Walker Group PLC, a troubled leisure company.
Two senior executives at food-and-drink giant Allied-Lyons PLC also got the message. On May 3, Chairman Sir Derrick Holden-Brown and CEO Richard G. Martin announced their early retirements after the company lost $250 million on options trading. Shareholders, including Norwich Union and Standard Life, will press management for other changes, including possible sell-offs of its breweries or some of its rich collection of brands. "The company needs to get its act together or they are vulnerable to a takeover bid," says John Thompson, senior investment manager at Standard Life Assurance Co.
Even such a giant as Britain's Imperial Chemical Industries PLC that has carefully courted its shareholders is feeling the heat. On May 15, Chairman Sir Denys Henderson discovered that corporate predator Hanson PLC held 2.8% of ICI's shares. Although Hanson says the purchase is for "investment purposes," some institutions predict a possible raid or mounting pressure on ICI to shed assets. For Sir Denys and his European cohorts, it's a dangerous new world.
WHO'S QUITTING UNDER PRESSURE
HORST W. URBAN CEO of German tiremaker Continental, forced out for impeding merger talks with Italy's Pirelli
DEREK LEWIS CEO of Britain's Granada, a media and computer services company, resigned to appease investors prior to a $280 million issue of new stock
CHAIRMAN SIR DERRICK HOLDEN-BROWN AND CEO RICHARD MARTIN Left British food-and-drink company Allied-Lyons following disclosure of $250 million in trading losses
CHAIRMAN MICHEL FRANCOIS-PONCET Pushed aside at French merchant bank Compagnie Financiere de Paribas following botched takeover bid for another French company, Navigation Mixte