COMMENT & ANALYSIS Home Depot is the start of something
Robert Nardelli’s disregard for shareholders was extreme even by US standards, as was the mismatch between his performance and reward. The defenestration of this high handed chief executive from Home Depot last week thus had all the marks of a symbolic turning point towards greater shareholder accountability.
His departure comes after a push in the same shareholder-friendly direction by the Paulson committee on capital market regulation. And it is noteworthy that Barney Frank, the incoming chairman of the House financial services committee, has hinted that having shareholders vote on chief executive pay may be the way to address the fat cat pay issue.
By contrast, continental Europe seems to be losing impetus on the corporate governance front, with poison pills making a comeback. The latest case concerns ThyssenKrupp whose annual meeting on January 19 includes a motion to give disproportionate representation on the supervisory board in relation to the share stake of the Alfried Krupp von Bohlen und Halbach foundation. This comes against a background of hostile bids and consolidation in steel.
A countermotion is being proposed by Vereinigung Institutioneller Privatanleger, the association of institutional shareholders, which is highlighting the fact that the change is being promoted by a supervisory board chairman, Gerhard Cromme, who spearheaded Germany’s corporate governance code. That looks like a symbolic case of revisionism.
Controversy also surrounds the fact that Mr Cromme is one of many in Germany’s top companies to have moved up from the chief executive role to the chairmanship. The Berlin government is pondering whether to take action on such moves upstairs.
Shareholders are also on the defensive in the Netherlands, where Centaurus Capital and Paulson, hedge funds with a combined stake of 31.4 per cent in the Stork industrial conglomerate, have been trying to urge deconglomeration on the management.
They have now become victims of a poison pill as Stichting Stork, a legally independent but related foundation, has exercised a call option on preference shares that have given it close to 50 per cent of Stork’s ordinary shares.
As well as seeking an injunction against the poison pill in the courts, the hedge funds are calling for the dismissal of the supervisory board at a meeting on January 18. Yet the odds against them are formidable, even though 86.5 per cent of shareholders backed their proposals at a meeting in October. The message is that shareholder rights are once again under siege in governance-weary Europe.
Emerging M&A
Developing countries have long been exporting capital to the developed world through the investment of their official reserves in government and government agency bonds in the US and elsewhere.
The bid battle between Brazil’s Companhia Siderurgica Nacional and India’s Tata Steel for Corus, the Anglo-Dutch steel group, underlines the point that the flow from poor to rich now also takes the form of direct investment via cross-border mergers and acquisitions.
The flow is hugely helped by the ready availability of credit at historically low spreads. In fact strategists at Bank of America estimate that developing countries spent a record $548bn (£284bn) on cross-border M&A deals in 2006, accounting for 15 per cent of the global total. Much of this was between developing countries. Were it not for US and European protectionism the figure for bids in the developed world would be much larger.
There is a certain poetic justice in this. Dani Rodrik of Harvard has estimated that the loss to developing countries from the build up of their reserves in low-yielding bonds amounts to close to 1 per cent of gross domestic product. M&A into the developed world offers the possibility of a higher positive return to off-set this cost, which amounts to an expensive insurance premium against financial crises.
The snag is that the cheap credit window may not stay open for long. And some bids, notably in steel, may prove expensive if this is the peak of the cycle. The recent plunge in the copper market, well described by Charles Dumas of Lombard Street Research in October as an accident waiting to happen, looks like a serious setback in the China-driven commodities bull market story.
Pro-market view
Events at Home Depot remind me of one of J.K.Galbraith’s best aphorisms. “The salary of the chief executive of the large corporations is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.” The arrival of compensation committees seems not to have made much difference.
John Plender is chairman designate of Quintain plc.
