European Boards Under Greater Scrutiny
Submitted by: L. Reed Walton, Publications, and Roland Escher, International Research Analyst
Scandals, concerns over control, and heavy losses at several large European firms have led some investors this year to consider voting against resolutions to ratify board actions.
Shareholders at many European companies are asked each year to retroactively “discharge,” or ratify the actions of, the management and supervisory boards and to indemnify directors against loss or legal action. At most firms, these management proposals are considered routine and pass with minimal resistance. However, at companies like Germany’s Volkswagen and Siemens, and Switzerland’s UBS, shareowners are expressing a greater reluctance this year to sign off on directors’ past decisions.
Wolfsburg-based Volkswagen likely will see resistance to its discharge resolutions and board nominees at its April 24 annual meeting. In October, the European High Court of Justice struck down a 47-year-old German law that capped investor voting rights in German companies at 20 percent regardless of equity stake. Dubbed the “Volkswagen Law,” the measure was primarily intended to prevent a hostile takeover of Volkswagen, Europe’s largest automaker. The law also imposed an 80 percent supermajority requirement to pass proposals at shareholder meetings, and gave the State of Lower Saxony--which owns a 20.1 percent stake in Volkswagen--the right to name two directors to the supervisory board.
Expecting the court ruling, Porsche--the German-based luxury automaker--increased its stake in Volkswagen to 31 percent, beginning in 2005, and said in January it would seek a majority stake to keep the company largely German-owned, the Associated Press reported. Porsche’s shareholders approved the strategy at a special meeting in March. Volkswagen also nominated Porsche’s chairman, Wolfgang Porsche, to the supervisory board at Volkswagen. These moves have drawn fire from investor groups who claim that management has allowed Porsche to gain control of the Volkswagen board with little resistance.
Vereinigung Institutionelle Privatanleger (VIP), a European association of institutional shareholder groups, on April 10 filed a counterproposal to Volkswagen’s discharge requests. The group complains that the company has done nothing to follow up on the “Volkswagen Law” court decision, nor has it endorsed either of two shareholder proposals to modify company practices in accordance with the ruling. Those proposals, one submitted by Porsche, and the other by Hannoversche Beteiligungsgesellschaft--the holding company for Lower Saxony--will be voted on at Volkswagen’s meeting.
Porsche is asking the company to scrap the 80 percent requirement. That move is opposed by Volkswagen’s works council (labor union), which has 10 representatives on the 20-member supervisory board. One of these labor representatives, director Bernd Osterloh, has denounced the actions of Porsche CEO Wendelin Wiedeking (also a supervisory board member), calling him a “Napoleon,” news reports indicate. Company insiders say that Volkswagen chairman Ferdinand Piech plans to oust Wiedeking to preserve his expansive powers at Volkswagen and maintain union strength, German newsmagazine Der Spiegel reported in March.
Lower Saxony has submitted a competing proposal that would retain the supermajority standard. This measure is opposed by Deutsche Schutzvereinigung für Werzpapierbesitz (DSW), which represents individual German investors and called the “Volkswagen Law” in any form an “anachronism,” the Associated Press noted.
In January, the German Ministry of Justice drafted new legislation that would end the voting rights cap but would keep the 80 percent supermajority rule and require shareholder approval of any plant relocation or construction. On April 14, European Commission Internal Markets Commissioner Charlie McCreevy sent a letter to German Justice Minister Brigitte Zypries, warning her that the supermajority requirements would not pass EU scrutiny. “All [the] provisions … need to be abolished in order to implement the ruling correctly,” McCreevy wrote.
EADS and Société Générale
Two other European firms that may see opposition to discharge resolutions at their annual meetings are Netherlands-based European Aeronautic, Defence, and Space (EADS) on May 26, and French financial firm Société Générale on May 27.
Several EADS executives and major shareholders are under investigation by the French Autorité des Marchés Financiers (AMF) on suspicion of insider trading. The investigation centers around stock sales by 17 people, including Ralph Crosby, head of EADS’ North American operations, and CEO Tom Enders of the company’s flagship aircraft construction company, Airbus, Bloomberg News reports.
Prosecutors allege that executives and major shareholders Lagardère Group and Daimler knew of delays in the production of the Airbus A380 superjumbo jet, and sold stock prior to the announcement of those delays, which resulted in a 26 percent stock price drop, news reports indicate.
Société Générale disclosed in January that a junior trader, Jérôme Kerviel, had made approximately $75 billion in unhedged bets on European stock futures. SocGen CEO Daniel Bouton held off notifying his board of the losses until he could guarantee a capital infusion by two U.S. investment banks, Fortune magazine reports. Bouton eventually whittled the losses down, but the company still lost about $7 billion. Since then, the French government and shareholders have lambasted Bouton and called for his resignation, blaming him and the company for a lack of vigilance. An internal investigation indicated that Kerviel’s supervisors overlooked or missed 75 alerts about his trading activities from 2006 to 2008, news reports indicate.
Another firm that likely faced opposition to board discharge was the Dusseldorf, Germany-based IKB Industriebank. At the company’s March 27 meeting, IKB supervisory board members faced shareholder wrath over an estimated €1 billion ($1.6 billion) fourth-quarter loss that stemmed from subprime mortgage investments, which have forced the company to consider a sale or face bankruptcy. Shareholder advocacy group Verbraucherzentrale für Kapitalanleger submitted a counterproposal asking investors to vote against ratifying directors’ actions for 2007. The company has not released vote results from the meeting yet.
Postponed Discharge Votes
Earlier this year, two major European companies postponed votes on their directors’ actions. Technology conglomerate Siemens, which held its annual meeting on Jan. 24, faces a corruption investigation that has spread to more than 10 countries. In 2006, a district court in the company’s home city of Munich initiated an investigation into bribery for contracts by Siemens’ former communications unit, the Com Group. Siemens hired U.S. law firm Debevoise & Plimpton to conduct an internal investigation in December 2006. The Munich district court eventually fined the firm €201 million ($319.5 million) for 77 acts of bribery, but the internal investigation is ongoing. The U.S. Department of Justice and the Securities and Exchange Commission are also investigating Siemens.
According to the International Herald Tribune, the law firm has uncovered “significant new information” relating to the involvement of several management board members in the alleged Com Group bribery scheme. As a result, shareholder group DSW urged the company to postpone the discharge vote pending the result of the Debevoise & Plimpton investigation, which the company agreed to do.
Swiss bank UBS also postponed a discharge vote this year after it recorded one of the largest mortgage-related losses of any bank worldwide--a total write-down of about $38 billion in the fourth quarter of 2007 and first quarter of this year. To offset the losses, the company brokered a CHF13 billion ($12.9 billion) capital infusion from the Government of Singapore Investment Corporation and an unnamed Middle Eastern investor, which was approved by shareholders at a special meeting in late February.
Swiss institutional shareholders Profond, Ethos, and ACTARES opposed the measure, arguing that a capital infusion by way of a rights issue to existing investors should have been made first. The groups also called for board chairman Marcel Ospel to step down. Amid the furor, the company has agreed to put forward a CHF 15 billion ($14.9 billion) rights issue for shareholders at its April 23 annual meeting and postpone the discharge votes. Ospel also announced that he would not stand for re-election to the board.
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