Why activists have to shout louder in Europe

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The power of shareholders over boards and managements can be measured in direct proportion to the noise they make. In other words, the more power they exercise, the less they shout in public to make their views and influence felt.

A recent study by European Corporate Governance Institute experts confirms this thesis and shows how hedge funds and other activist shareholders in the UK are far quieter than their US and continental European counterparts.

UK law gives far greater powers to shareholders to influence company boards than similar legislation in the US and other European countries – notably the Netherlands, whose corporate governance rules and legislation have turned it into one of the world’s most board-friendly countries.

Shareholder activism has been particularly effective in the UK without causing all the public cacophony found in the US or some European countries because of the “nuclear deterrent” available to shareholders. Simply put, UK shareholders can call extraordinary meetings with 10 per cent of the voting share capital and put forward propositions to remove any and all directors if more than 50 per cent of votes cast favour the resolution.

With activist funds often able to muster enough votes to topple the board, directors and shareholders have tended to resolve their differences in private. The ECGI study focused on the Hermes UK fund and found that it had succeeded in securing its desired outcomes in the majority of cases. In most cases, the fund’s engagement with the companies was conducted through behind the scene contacts with management, board members and other shareholders and far less at public shareholder meetings or other public channels.

This is in sharp contrast to the noise activist shareholders must make in the US where state of Delaware law and the might of corporate boards traditionally favour incumbent management. The same applies to continental Europe where the showdown at Stork in the Netherlands has shown the extremes activist funds will go to in their effort to press public and political opinion. Since the system is stacked against them, the only way to force change is by trying to secure the necessary political and government support.

The same applies to other European countries where big shareholding blocs, relationships and crony networks can still be put in place to frustrate activists. With hedge funds and other activist shareholders continuing to raise their voices – and the continuing debate about the value or shortcomings of shareholder activism – it is no surprise much of corporate Europe is now closing ranks to keep out the troublemakers.

Protectionist dividend

The French government rushed to the rescue of its national yoghurt maker a couple of years ago by making it clear it would do everything to oppose a hostile takeover of Danone by PepsiCo. The US group never launched a bid and Danone became the first example of what has since become known as French “economic patriotism”.

Yet two years earlier and well before the term “economic patriotism” entered the European corporate vernacular, the region of Hamburg had already engaged in a similar exercise to prevent the local Nivea beauty cream manufacturer Beiersdorf falling prey to Procter & Gamble.

The Land, or regional government, acquired a 10 per cent stake in Beiersdorf, paying Allianz a 15 per cent premium for it. The insurer was then seeking to trim its holdings in German companies. At the same time, the German coffee distributor Tchibo became Beiersdorf’s controlling shareholder with just over 50 per cent. Allianz also kept a 7.85 per cent stake, which it still owns.

Now that the US takeover threat has disappeared and Beiersdorf shares have enjoyed a good run, the Land has decided to take its profits and sell. It is now expected to use this dividend to help finance and preserve the German identity of another big Hamburg industrial employer – EADS.

The Land together with two other German regions are due to join a group of banks about to take over the 7.5 per cent stake that DaimlerChrysler, the EADS German core industrial shareholder, is shedding in the aerospace group.

Much as it did with Nivea, the Land must be hoping to cream off the profit of its new investment when EADS and Airbus finally recover.

Uneasy peace

An uneasy peace now reigns at Safran, where former French finance minister Francis Mer arrived this week as chairman. He was parachuted into the 30.8 per cent state-owned aero-engine and mobile phone group to end a bitter feud between rival management camps.

The warring chiefs in each camp have agreed to leave later this year, but clearly some have not given up hope that they will be asked to stay. However, this looks like wishful thinking. Mr Mer will want to stamp his mark on the group and the outgoing French government or indeed the winner of this year’s elections will want to secure juicy jobs for some of their most loyal servants.


World View

Misys finds direction

Mike Lawrie, a former IBM veteran and ex-chief executive of Siebel Systems, has worked fast to draw a line under last year’s grisly failed attempt by management to buy Misys, the British banking and healthcare software specialist. The latest evidence is Thursday’s clear-out of ancien régime executives who backed the MBO and the appointment of people the new chief believes can implement his turnround plans.

The changes are reassuring for investors who have lived through the past two years of turmoil. By removing the MBO team put together by Kevin Lomax, founder and ex-chief executive, Mr Lawrie has put that messy period behind the company, and started the recovery surrounded by more familiar faces.

Of the trio joining the group, one worked with Mr Lawrie at IBM and another at Siebel, during his brief tenure as chief executive of the US software group.

Meanwhile, ValueAct Capital, the US hedge fund that was Mr Lawrie’s last employer and started buying shares after his appointment at Misys, now owns a 9.5 per cent stake. Jeffrey Ubben, the fund’s co-founder, joined the board this week.

ValueAct’s record in the US shows it to be a long-term but activist shareholder. Normally it builds influence in the boardroom gradually. At Misys, it has established a foothold very fast, helping the shares recover to a level where they seem fairly valued. If Mr Lawrie’s plan for Misys does not work out, other shareholders may look back and feel that one disruptive dominant force, in the form of Mr Lomax, was simply replaced by another, in ValueAct. But for the moment, they should be satisfied that, for the first time in a while, everyone at Misys seems to be heading in the same direction.


Malaysia shines

Investors largely ignored Malaysia after the government of Mahathir Mohamad imposed capital controls in response to the Asian financial crisis of 1998.

The capital controls have gradually been eliminated and Abdullah Badawi, who succeeded Dr Mahathir in 2003, is quietly succeeding in pushing ahead with economic reforms. Fund managers are beginning to notice.

Kuwait Finance House this week said it would buy a controlling stake in RHB Bank. The deal is the second in as many months that the government has allowed foreign banks to buy significant stakes in the once protected banking sector.

Other economic taboos are falling. Proton, the state-owned carmaker , is on the verge of being sold to one of several foreign bidders that include Volkswagen, PSA Peugeot Citroën and General Motors.

Overmanned and inefficient state companies are being restructured, with big lay-offs at Malaysian Airlines and the transfer of domestic routes to private budget carrier AirAsia.

The reforms led to a 20 per cent rise in the Malaysian benchmark index last year, with most of the gains in the past three months. Surveys among fund managers now place Malaysia among Asia’s best performers this year. Investors should not expect that the reforms will go unchallenged since they are threatening the interests of the politically influential ethnic Malay business elite. But Mr Abdullah seems to be gaining momentum in forcing change.


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