Yankee Style Activists Strike Boardroom Terror AbroadRichard A. Melcher
It came as no great surprise last spring when Andrew R.F. Buxton won the new slot of both chairman and chief executive at Barclays Bank PLC, effective Jan. 1, 1993. After all, Buxton, the scion of one of the bank's founding families, over 30 years had worked his way up the corporate ladder to No.2. But by December, outside directors--goaded by big shareholders--had reconsidered, blaming Buxton for mounting bad debts and sagging earnings. Buxton was forced to cede the CEO job to another executive, probably by this spring.
The U.S. isn't the only place where shareholders are rising up to change the way companies are run. Britain, too, is being rocked by a campaign for better governance. Since 1990, angry shareholders have claimed the scalps of top executives at Burton Group, British Aerospace, and British Airways, among others.
More striking, the shareholder uprising is reaching across the globe. In Canada, Continental Europe, and Japan--where entrenched bank cliques, families, and governments hold sway over managers--shareholders are trying to change the balance of power (table). They often face stiff obstacles, such as the absence of the one share/one vote principle. Still, says Robert Sillcox, senior vice-president for investments at Ontario's $13 billion Municipal Employment Retirement System: "The subject of corporate governance is on everyone's lips." Doubting corporate managers might well recall that as recently as two years ago, many U.S. and British executives dismissed out of hand the prospect of institutional uprisings.
The global economy will heighten pressure to give shareholders a bigger say. As national economies increasingly grow interlinked, more capital is flowing beyond national boundaries. Fund managers and institutions will open their wallets, but only in return for corporate openness, basic shareholder rights, and--possibly--more influence.
Countries and companies that don't respond have already turned off some foreign investors. Martin G. Wade, chief investment officer at $7.5 billion Rowe Price Fleming International, now steers clear of Italy, which gives minority shareholders short shrift. "Once you've been mugged enough times," snaps Wade, "you have to ask: Why hold the shares?"
At a minimum, big investors are demanding international standards of corporate behavior, accounting clarity, and disclosure. They're seeking an end to antitakeover poison pills. And they want to outlaw the outsized voting rights given certain classes of shareholders--for example, the 10 "priority shares" that hold all voting power at the Netherlands' Philips Electronics, which are in hands loyal to management. "We want to see the other European systems come into line with those of the U.S. and U.K.," says Anthony Bolton, senior investment officer for Fidelity Investments Services Ltd. in London and one of Europe's leading activists.
Investors also want better performance: Canada's Sillcox, for one, pledges to begin working to influence strategy at laggard companies, though he prefers to work behind the scenes and avoid big public battles.
`OFF THEIR BUTTS.' In Britain, activism took off thanks to financial scandals at Maxwell Communications, Polly Peck International, and the Bank of Credit & Commerce International. Then, "with a lot of companies performing poorly," says Fidelity's Bolton, "institutions got off their butts."
They have found ammunition in the December publication of the Cadbury Report on corpmrate governance, the result of an 18-month study by leading regulators and industrialists. Endorsed by Britain's corporate elite, the Bank of England, and the London Stock Exchange, the report codifies "best" corporate practice. Among its key, but voluntary, recommendations: Split the posts of chairman and CEO, increase the say of independent directors on audit and compensation committees, and disclose executive pay more fully. British companies will have to report compliance to the stock exchange. And the report's influence may spread:
Fund managers in Canada and Australia are eyeing its impact.
Meanwhile, some British institutions are demanding representatives in the boardroom. Fidelity, for example, managed to install new outside directors at advertising giant WPP Group PLC and Teledanmark, the Danish phone company. Explains Alastair Ross Goobey, CEO of the $30 billion Postel Investment Management Ltd.: "We see ourselves playing a policeman's role."
To maximize their clout, the British--particularly Fidelity--are increasingly joining in common cause with local fund managers in the Netherlands, Spain, and elsewhere. Increasingly, they're sharing data and tactics across borders.
American funds are helping to blaze the path. The $70 billion California Public Employees' Retirement System recently launched an international governance program, specifically targeting companies in Japan, France, and Britain. Last year, CalPERS voted unsuccessfully against a poison-pill takeover defense at French food giant BSN and tried unsuccessfully to push new directors onto the boards of Nomura Securities Co. and Daiwa Securities Co.
A MARKER. In December, it joined forces with funds in Germany to try to undo an arrangement at electricity maker RWE that gave minority shareholders a majority of the voting rights. Nicolaus-J urgen Weickart, a Frankfurt shareholder-rights lawyer, argues that even in defeat, CalPERS put down a marker. "It was impossible to win," says Weickart, "but it was the first time [Deutsche Bank and Dresdner Bank] abstained from voting their proxies." The CalPERS move and a series of recent hostile takeovers in Germany have emboldened others. A Mar. 11 shareholder proposal at Siemens, the electronics giant, to strip multiple voting rights from the descendants of the founding von Siemens family is given a reasonable chance of succeeding.
A cadre of local gadflies, such as Weickart, also are sowing the seeds of wider shareholder activity. Former Nestle manager Andre Baladi, now an independent investment adviser, has been railing against the Swiss food giant's dividend policy for years and was in a camp of investors who succeeded in opening registered shares to foreign holders. And though the Dutch Shareholders Assn., a group of small investors and institutions, failed last year to block a merger of Nationale Nederlanden and NMB Postbank, it did manage to get the price raised. Meanwhile, Deminor, a Belgian company representing small holders in Wagons-Lits, a travel-services company, has won a court judgment against French hotelier Accor to get a higher price in a takeover. Accor is appealing.
Investor disenchantment is growing even in Japan, where crosslinks between corporate groups and banks is now seen as making managers too entrenched. Shareholders, growing restless with low dividends and paltry earnings, now have some heavy backing. A Japanese Justice Ministry committee just proposed changes to the commercial code to force companies to take on truly independent auditors and to ease the way for investors to sue company officials.
PROSELYTIZING. Shareholders all over the world eagerly watch the U.S. CalPERS' CEO Dale M. Hanson is often sought out for advice by institutions in Canada and Japan. American activist Robert A.G. Monks, founder of Lens Inc., in February traveled to Australia, Singapore, the Netherlands, and Germany proselytizing to shareholders. The Dutch investment funds, with big international holdings, look particularly promising to him. Says Monks: "We'll probably help them devise a program [for Europe] through which they can become suitable active shareholders without creating undue problems."
None of this is being lost on heads-up managers. Britain's struggling Imperial Chemical Industries PLC, for example, has been moving fast to change course and to court institutions. On Feb. 25, its board approved the biggest corporate breakup in British history, splitting the manufacturing bulwark into separately quoted chemical and drug units. And in Germany, Boston Consulting Group Inc. is advising companies on enhancing shareholder value. "The trigger has been that international investors are exerting more pressure," says Thomas Lewis of BCG's Munich office.
From Tokyo to Toronto, Berlin to Birmingham, shareholders are demanding to be heard. And executives are beginning to learn that rebuffing them may well risk their jobs, access to capital, and eventually, the ability to compete in a global economy.
BETTER GOVERNANCE: IT'S SPREADING BEYOND THE U.S. BRITAIN Shareholders help force ouster of several top executives. The Cadbury Report on corporate governance recommends splitting chairman and CEO jobs, installing majority of outside directors, and more complete disclosure of directors' pay. JAPAN Ministry of Justice proposes rules to force companies to use independent auditors and to allow suits against directors for poor performance. Investors are clamoring for higher dividends. BELGIUM Laws that limit shareholder voting powers are narrowed, making it easier to take over companies. Shareholder activist company Deminor is formed to give voice to small investors. THE NETHERLANDS Antitakeover poison pills are prohibited at new companies. Dutch Shareholders Assn., representing small investors, pressured NMP Postbank to raise the price in a recent takeover. AUSTRALIA Major institutions join forces to monitor corporate performance--and shake up the laggards. DATA: BW