Rending Corporate Europe's Veil

Banks and companies hold big passive stakes in one another and sit on each other's boards. Company statements are opaque and hide true underlying assets and performance. Hostile takeovers are practically impossible. Managers are entrenched. Politics pervade decision-making.

Is this Japan's keiretsu interlocking corporate system? Nope. Try cozy Corporate Europe. A shareholders' revolt is breaking open the closed world of corporate life. In just the past year or two, a new breed of shareholder activist has succeeded in ousting Compagnie de Suez Chairman Gerard Worms and Navigation Mixte founder and Chairman Marc Fournier. Activists are challenging the recent Italian megamerger of Gemina and the failed Ferruzzi business empire, which would be controlled by Italy's most powerful business families. And they are going after even the strongest of European business barons, including Deutsche Bank CEO Hilmar Kopper.

What's behind the shareholder revolt? New shareholders. The need for capital is driving European companies to sell their shares offshore, mostly to American pension and mutual funds. They are also privatizing at a fast clip, creating a new class of small shareholders throughout Europe. Both the foreign funds and local, individual shareholders have very different interests from the inbred cadre of executives currently in charge.

Transparency, for example, is exactly what American funds demand in exchange for capital. Yet that is precisely what most German, French, and Italian companies strive to avoid, preferring to do their business in private. But with U.S. funds buying up to 20% of the $500 billion in stock issued by Europe's privatized companies, the demand for transparency is growing. When German companies list themselves on the New York Stock Exchange to sell shares and raise capital, the quid pro quo is more information provided to American investors.

Foreign funds are among the most active of shareholders. The College Retirement Equities Fund, for example, recently objected to the Italian merchant bank Mediobanca's behind-the-scenes moves in Gemina's Sept. 1 takeover of Ferruzzi. Mediobanca is the Deutsche Bank of Northern Italy, with stakes in nearly all of the region's blue-chip companies. It sits at the center of a web of interlocking company shareholdings. CREF is waging battles all over Europe, fighting for management to maximize asset values, sometimes through hostile takeovers.

European shareholders are stepping forth as well. The heaviest action has been in France, where the largest companies continue to hold major stakes in one another and directors don't even have a fiduciary responsibility to protect investors. In June, shareholders, including Compagnie Financire de Paribas and insurer Allianz, dumped the management of the $3.1 billion holding company Navigation Mixte because they were unhappy with Fournier's lack of strategic vision.

As a result of shareholder activism, corporate governance has become a hot issue in Europe. The European Commission is working on new guidelines. Governments aren't waiting. In July, the Confederation of French Industry issued a code that endorses independent directors and the end of cross-shareholdings. Germany is developing a voluntary code on corporate takeovers. But none of this matters unless company executives change their own attitudes. They must take the lead in changing accounting practices, opening up boards of directors, and publishing vital financial information. If they don't act, their new shareholders certainly will.

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