European Shareholders: Mad As Hell
More talk than action. That has long been the problem with the shareholder rights movement in Europe, where activists have struggled for years to influence corporate behavior. Managers on the Continent have been so entrenched that they rarely have had to worry about shareholders making serious trouble.
But this spring, activists have been scoring a surprising number of hits. Shareholders big and small are taking on companies as diverse as Daimler Benz, British Aerospace, Banque Nationale de Paris, Montedison, and Eurotunnel (table). Investors are demanding greater disclosure of executive pay, urging companies to spin off unrelated assets, complaining to authorities when they think they have been misled, and even staging protest marches when they think they're being sold out. It's not a boardroom revolution yet. But the activists are showing enough strength to prove that shareholder rights are taking root and flourishing in Europe.
"TIDAL WAVE." Many of the successes stem from pressure from big institutional shareholders. "The responsiveness to shareholder concerns has increased enormously. It's like a tidal wave washing over Europe," says Corinna Arnold, director of global shareholder services at Investor Responsibility Research Center, a Washington (D.C.)-based consultancy.
In one example, shareholders in Compagnie d'Investissements de Paris have been grumbling for two years that Banque Nationale de Paris, which controls 84% of the investment company, did nothing about the low trading price of CIP shares. But this year, finance house SBC Warburg, which owns 2.7% of CIP, planned to demand action from BNP. On May 21, a week before CIP's annual meeting, BNP caved in, offering to buy out CIP shareholders at a 30% premium. The offer still doesn't reflect the full value of CIP's portfolio, "but it's a lot more attractive than sitting out in the cold like most minority shareholders in France," crows one dissident.
American institutions are adding to this pressure. Billions in capital from U.S. funds are flooding world markets--with strings attached. The California Public Employees' Retirement System (CalPERS) last year increased from $11 billion to $18 billion its stake in such European equities as Glaxo, Deutsche Bank, and LVMH Moet Hennessy Louis Vuitton. To hold managers' feet to the fire, CalPERS plans to issue corporate governance guidelines in Britain, Germany, and France.
Analysts now see companies taking action to calm big shareholders. France's Chargeurs is splitting itself into a textiles and media company to allay concerns about underperforming shares. "This is an example of a restructuring you wouldn't have seen in France just a few years ago," says Gary Dugan, a European equity analyst for J.P. Morgan in London. Chargeurs stock has risen more than 50% since January.
Also in France, Compagnie de Suez, long accused of ill-focused management, sold Banque Indosuez to Credit Agricole in April. In mid-May, Compagnie Financiere de Paribas sold control of construction group Poliet to glassmaker Saint-Gobain. Lyonnaise des Eaux, under a corruption probe, named three foreigners to its board and an executive to oversee ethics matters. In Britain, British Telecommunications PLC has tightened performance criteria in an executive bonus plan that some institutional shareholders challenged.
TUNNEL VISION. Small shareholders are nipping at managers' heels, too. Activist Sophie L'Helias is working with individual shareholders of Eurotunnel Group, the troubled Channel tunnel operator. She plans to launch France's first mass proxy action to block a debt-for-equity swap that would aid 225 banks but nearly wipe out small shareholders. L'Helias has bought space in French newspapers to run ads containing a blank proxy, which shareholders can fill in and mail back to her. And at the June 27 annual meeting, L'Helias plans a vote condemning the swap, which has not even been formally introduced. "The idea is to show that if we [can] mobilize this time, we can come back with even more votes when the plan is presented," she says. Some 8,000 Eurotunnel investors even marched in Calais to protest the banks' plans.
German giant Daimler Benz knows what it's like to be harassed by small shareholders. CEO Jurgen E. Schrempp has moved to reverse Daimler's disastrous diversification of the last few years, pulling out of such money-losing ventures as airplane maker Fokker and taking a record $3.7 billion loss. He's also embracing the idea of stock options to improve executive performance.
Yet at Daimler's annual meeting on May 22, Schrempp was excoriated for Daimler's poor results by unhappy shareholders, including University of Wurz-burg banking professor and corporate gadfly Ekkehard Wenger. Only a stellar rebound in profits and reinstatement of the dividend will satisfy Wenger and other dissidents. Meanwhile, a lawsuit filed by a Wenger follower has prompted a state probe into whether Schrempp and others misled investors about the company's likely profits a year ago.
It will take a long time to undo the cozy relationships that still upset shareholder activists. The erupting scandal at German engineering company KHD, for example, is raising more questions about the wisdom of having banks hold major equity stakes in Germany Inc. Deutsche Bank, already under fire for poor supervision of other investments, holds 48% of KHD, which accuses some managers of hiding huge losses.
Reforming such practices as the shareholding and supervising roles of German banks will take years. One hope is that a new generation of corporate leaders may support further reform. Big companies in Italy, for example, have long been dominated by a close network of core shareholders. Yet in a recent interview, Giovanni Alberto Agnelli, the nephew and designated heir of former Fiat Chairman Giovanni Agnelli, surprised many by saying he would "work to diminish the role of the old shareholders' syndicates" while giving more power to boards and making them accountable to outside investors.
Those are new ideas for the Old World. A growing army of shareholders vows to turn them into reality.