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E-MailKen Altman is the President and founder of The Altman Group. This post is based on an Altman Group Governance & Proxy Review article by Asha Doogah and Frank J. Cifarelli.
About a decade or so ago, publicly traded German operating companies were characterized by stable management boards with mostly German nationals serving as board members, and stable shareholder bases characterized by a preponderance of cross-holdings by German banks, insurance companies and other operating companies. In general, there was little shareholder activism and German companies were run using a consensus style basis, with different parties giving input and decisions being made that strived for unified outcomes among the different stakeholders. This source of stability aided the German economy and allowed Germany to develop into one of the wealthiest, most prosperous Western Democracies in the world. In fact, Germany became the world’s leading exporter until only overtaken by China this past year.
However, Germany’s foray into the global economy now makes German companies recognize the important topic of corporate governance, which is a world-wide phenomenon that publicly traded companies must address. Currently, foreign investors are investing in German companies to a larger degree than in the past and activist shareholders are making their views known to management and taking action as a result. In their 22nd of August, 2008 edition, the highly respected German newspaper, Handelsblatt, published their leading story with the headline “Foreigners increase pressure on companies – international investors use general meetings for criticism.”
An important recent incident that occurred in February of 2010, was when Hermes, an activist investor domiciled in the UK, tried to block the re-election of incumbent Klaus Wucherer as Chairman of the Board for Infineon Technologies AG. 72.5% of the vote went to Mr. Wucherer and he was re-elected, but the fact that 27.5% of the vote went against Mr. Wucherer demonstrates a significant level of opposition. Even though Mr. Wucherer was re-elected, he has promised to remain as Chairman for only one year. Instead of Mr. Wucherer, Hermes proposed Willi Berchtold, who is currently the Chief Financial Officer of the German auto supplier ZF Friedrichshafen. Hermes’ position stated that “a new start at Infineon requires further renewal, particularly at the top of the supervisory board”. Hermes also added that by the board ignoring shareholder concerns, this will be “particularly problematic”. At the same meeting, shareholder activism did prevail on Agenda Item 6, where the authorization to repurchase and use Infineon’s own shares was rejected at the AGM. The Altman Group believes that this meeting may have been a watershed event for corporate governance and shareholder activism in Germany.
There have been a number of high-profile proxy fights in Germany recently. After new laws on “Say on Pay” were enacted in 2009, the first AGM that occurred after the new laws went into effect was the Siemens AGM in January of 2010, where although shareholders approved a non-binding vote on the company’s executive pay policies with 89.6% of the votes cast in favor, 10.4% voted against this resolution, a rather high percentage to vote “No” for such an item. At that same meeting, two agenda items were actually defeated – one on new rules governing the supervisory board compensation, and another one amending part of Section 2 of the Articles of Association.
Recently, Porsche Automobile Holding SE tried to acquire Volkwagen AG. On the 25th of January, 2010, the hedge funds Elliott Management, Glenhill Capital, Glenview Capital and Perry Capital filed a lawsuit against Porsche and its former CEO and CFO for over $1 Billion, accusing the defendants of lying about Porsche’s intent to take over Volkswagen. The four hedge funds were shorting Volkswagen stock, and allegedly lost over $1 Billion when Volkswagen’s stock price surged upward after Porsche announced having a 75% stake in Volkswagen. Additional investors who lost money from Porsche’s stealth move are anticipated to join the lawsuit, which could increase the amount being sued for to over $10 Billion. The charges against Porsche contend that it was covertly increasing its stake in Volkswagen beginning in 2005, while overtly denying its intention to the markets and general public that they were interested in taking over the company. Taken in by Porsche’s public denials, the hedge funds were obligated to buy back the Volkswagen stock at higher prices after selling short.
One topic sure to have significant impact on the composition of boards of directors in Germany involve a recent Government Commission on the German Corporate Governance Code, which recommended greater diversity for the supervisory section of the board and developing methods to have more women and international representatives on the boards. In addition, the Commission recommends expanding additional training and continuing education, which will improve the professionalism of supervisory boards and existing members. It is hoped that these educational enhancements will lead to better legal practices, and more accurate financial statements and risk control. Later this year, the Commission will review companies listed on the German Stock Exchange to see which companies have best implemented these recommendations. The Altman Group has studied a sample of German company websites and we have found that most listed German companies have already either implemented or are in the process of implementing these changes.
Since the changes to the German Corporate Governance Code were issued on June 18, 2009, The Altman Group has observed an aggressive approach to implement these recommendations throughout Germany as well as in the rest of the European community, which have similar country-specific mandates. From our research, it is one of the main topics pertaining to corporate governance occurring around the world. In response, the challenge of developing and implementing a new style of shareholder activism will set a precedent for shareholders’ voices, and will certainly establish an opportunity for activist shareholders to ask for change. Hermes has opened the door to a new chapter in the investor world. Prior to Infineon, there had never been a proxy fight at a DAX30 constituent’s AGM over appointing members to the Supervisory Board. These new developments represent a seismic shift in Germany regarding shareholder activism.
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Of note in the evolution of German corporate governance, the recently passed New VorstAG Act (2009)has resulted in the supervisory board (Aufsichtsrat) members of German companies assuming personal liability for the appropriateness of remuneration packages. This act has also prompted many German companies to put their remuneration plans to a shareholder vote. In addition to the Siemens vote cited above, this has been taken up by a number of prominent German companies (including Thyssen Krupp, RWE, Henkel,Bayer, BASF, Daimler, Deutsche Post, Munich Re, Deutsche Telekom, Deutsche Bank, Volkswagen, E.on, BMW, Commerzbank, Adidas). At F&C Investments we have voted on over 60 such plans year to date. This optional vote has been primarily taken up by larger companies and less so by the midcap/Mittelstand sector. Compared to other jurisdictions (notably the US and the UK) the quantum of German pay plans is generally more restrained. However, the structure of many of the plans in terms of balance between short and long-term, shares versus cash and clearly articulated performance conditions has been generally found wanting. At F&C we have voted against most plans on this basis, and will be writing to German companies we invest in to clarify our concerns and to suggest structural improvements. On the whole, however, this has been a positive development and should continue to strengthen the voice of foreign shareholders investing in German companies.
A less positive example of German corporate governance continues to be Volkswagen. In the context of an ownership structure which includes the Piech and Porsche families, as well as the German state of Lower Saxony (Niedersachsen) and the Qatari sovereign wealth fund, minority institutional and retail shareholders come across as afterthoughts, particularly in light of the abusive “creeping takeover” of Volkswagen by Porsche in 2008 and the subsequent battle between the Piech and Porsche family interests– where long-term value creation appears to rank below empire building. To add insult to injury, Volkswagen is the only major German company to require complex and bureaucratic forms to be completed before institutional investors are permitted to vote on behalf of their clients’ investment holdings in Volkswagen through the process of proxy voting. This has had the practical effect of discouraging many institutional investors from voting at — and keeps Volkswagen from hearing the voice expressed by minority investors through the exercise of voting rights. At F&C we have expressed our concerns by voting against the release (Entlassung) of both supervisory board and management board members from their liabilities– a standard vote at German AGMs. But given that the shareholder vote at Volkswagen is already stitched up by controlling shareholders, the practical impact of this expression of lack of confidence is, unfortunately, not likely to be significant.