Europe's Corporations Finally Get It

European companies are under growing pressure from U.S. pension and mutual funds and an increasing number of European funds to raise their share prices. For several years, the strategy of these new investors has been to push for better corporate governance. They are finally getting results and meeting with far more success than anyone predicted even a year ago.

Most blue-chip European companies are part of a web of cross-shareholdings, controlled by other industrial conglomerates or banks, which historically have not been bothered by low returns. If this sounds like Japan, it is--it closely resembles the keiretsu. This protective shield of cross-ownership, made bulletproof by uneven voting rights, makes most companies immune to takeovers. The result: entrenched, unresponsive management. Financial disclosure laws are lax enough so that company accounts can hide major problems, from underfunded pensions to financial irregularities.

But pressure from new investors is changing the European corporate system. Companies all over the Continent are disclosing more information, tying executive pay to performance, spinning off unrelated assets to boost shareholder value, and forming investor-relations departments.

In the case of Daimler Benz, a new generation of leaders is reforming corporate governance because of the need to tap global capital markets and maintain competitiveness. Without transparency in its balance sheets, Daimler cannot raise capital in U.S. equity markets. In addition, by refusing to pump more cash into money-losing Dutch airplane maker Fokker, CEO Jurgen E. Schremp showed he is far more attuned to the concept of shareholder value than was his predecessor, Edzard Reuter.

Sometimes, companies are coming to new corporate governance kicking and screaming. Banque Nationale de Paris is paying a 30% premium to buy out unhappy shareholders in a subsidiary, simply to avoid an embarrassing showdown at the annual meeting.

In other cases, pesky individual shareholder activists are leading the way to new corporate behavior. Eurotunnel stockholders, fearful that the company is about to wipe out what little value remains in their shares by agreeing to swap $12 billion owed to banks for equity, have hired a U.S.-trained lawyer to fight for them. To prepare for an upcoming vote, the lawyer is now trying to put together the first mass proxy solicitation in Europe's history.

True, some companies talk the talk but don't really seem willing to change, yet. Deutsche Bank is Germany's largest and most powerful institution, with seats on the boards of more than 100 large German companies in which it holds major stakes. It holds 24% of Daimler Benz. Company officials often speak in favor of strong corporate governance, yet Deutsche Bank can't seem to police the companies it has large stakes in. The latest fiasco centers on its 49%-owned engineering company, Klockner-Humboldt-Deutz, which faces collapse after revealing on May 28 that it hid hundreds of millions of dollars in losses.

The global market for capital means money will flow to the places that offer the highest returns for the least amount of risk. European companies are right to worry that they will lose out in the race to attract this footloose money. It means they should try and hold on to those features that work for them, such as apprenticeship programs, but adapt to the new Anglo-Saxon model of corporate governance. It would be wrong for European companies to become obsessed with quarterly results, as many U.S. companies have in recent years. But opening their books, focusing on core businesses, and dumping losers can only boost productivity and profits.

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