For students of management, Zurich-based ABB has long been a textbook case. After Percy Barnevik created the company in a giant merger of Swedish and Swiss-German heavy industry in 1988, he rocketed to fame as an apostle of shareholder value in the Jack Welch mold. The environmental and power giant's market capitalization soared eightfold, to about $25 billion, in February, 2000. ABB was a paradigm of European capitalism at its best.
Well, this paradigm has been turned abruptly on its head. Prompted by its largest shareholder, Swiss investor Martin Ebner, ABB revealed on Feb. 13 that Barnevik was awarded an undisclosed $78 million severance package without the board's knowledge after he stepped down as CEO of ABB in 1996. The secrecy and size of the award, which is eye-popping even by U.S. standards, have created a hullabaloo in northern Europe, especially in Barnevik's native Sweden.
Now, Barnevik, 61, who always posed as an advocate of strong boards and transparency, looks like a hypocrite. And you can imagine what the socialist-minded Swedes think of Barnevik's conviction that American-style capitalism was the only way to go. "This is a sort of Swedish version of Enron," says Klas Eklund, chief economist at SEB, the Wallenberg-dominated bank.
But it's not just a humiliating rewrite of the Barnevik story. The attack is focusing attention on Investor, the Swedish company that acts as the investment vehicle of the Wallenberg dynasty. For years, Investor dominated ABB through its holdings in a special class of ABB stock. Investor has also long held key positions in other companies, from Sweden's Ericsson and Electrolux to London-based AstraZeneca. And Barnevik has acted as the management brains behind the Wallenbergs. He stayed on as chairman of ABB until late last year and still has that role at AstraZeneca.
Now the uproar over Barnevik's pay packet is focusing investor attention on the messy reality behind ABB's reassuring numbers--and leading to sharp questions about the wisdom of having the Wallenbergs control an empire of companies through special-class shares. The storm of criticism comes at a vulnerable time for the Wallenbergs, as two cousins, Marcus and Jacob, are still feeling their way as the new leaders of the family. All of this is playing into the hands of Ebner, a shrewd investor activist who is Swiss in nationality but American in attitude. If Ebner gets his way, the result could be one of the biggest upheavals ever in Corporate Europe.
Ebner has been waging a mostly low-profile war against ABB and the Wallenbergs. But now, the Swiss activist is outraged about what's happening at ABB and Investor, which is also publicly traded. Ebner has lost an estimated $800 million in the past 12 months on his 10% stake in ABB. Analysts think he is also down about $150 million on an 11.4% stake in Investor. Ebner-watchers think he may seize the moment to step up the pressure on the Wallenbergs to break up both ABB and Investor. Ebner has already used his influence to install a new chairman at ABB, J?rgen Dormann. In the longer run, Ebner may push for an end to the dual-share system that perpetuates the Wallenbergs' hold on power.
ABB's financial reports certainly deserve closer scrutiny. When the company switched to generally accepted accounting principles last year, analysts at Deutsche Bank in London discovered that about 28% of reported net income between 1998 and 2000 was actually from nonoperating sources such as property and business disposals.
So ABB turns out not to have been the earnings juggernaut investors thought it was. And the problems don't stop there. ABB is now struggling to survive asbestos liabilities that could add up to $940 million or more. It lost $691 million in 2001 and took $1.34 billion in charges, including accounting changes, asset write-offs, and asbestos provisions. ABB's stock has dropped by about 50% in the past year, but Deutsche Bank analyst Mark Cusack still thinks it is overvalued. "The world isn't going to stay still and let ABB restructure in peace," he says. "People are going to go after their customer base and market share."
Barnevik must take responsibility for the mess at ABB. He was instrumental in picking his successor as CEO, Goran Lindahl. But Lindahl departed unexpectedly at the end of 2000 and was succeeded by J?rgen Centerman, who has been trying to get on top of mushrooming problems. ABB's inner workings were so secretive, the company now acknowledges, that only Barnevik knew the details of his and Lindahl's severance. In an interview, Centerman insisted that the restructuring was beginning to work and that last year's sales--up 3%--had held up well in a tough environment. "We have turned the page," he says.
That may be so. But the Barnevik payment revelations have touched off a furor in Sweden, which always had a love-hate relationship with the ABB boss. Now, everyone is rushing to heap dirt on the fallen hero. Labor unions are calculating how many laid-off workers Barnevik's remuneration might have kept employed. Lars-Eric Forsgardh, head of the Swedish Shareholders Assn., which represents individual investors, termed Barnevik's payout "obscene." Even Prime Minister Goran Persson weighed in, saying: "I have great difficulty understanding how [Barnevik] could have done something so lacking in judgment." Barnevik, who could not be reached for this article, defended himself in a Swedish newspaper interview by saying the severance package was based on ABB's results.
The scandal puts the Wallenbergs in a tight spot. They have long been able to convince other shareholders and the Swedish government that their presence on boards and role in choosing top management made a positive contribution to such companies. But the Wallenbergs look weaker than ever. One former Wallenberg manager says that whatever Barnevik's foibles, Investor may be in worse shape without him. The reasoning: Marcus Wallenberg, Investor's 45-year-old CEO, isn't seasoned enough for the top job; Claes Dahlback, a former Investor CEO who replaced Barnevik as chairman, is too much the Wallenbergs' man; and Marcus' cousin Jacob, also 45, isn't tough or savvy enough to take on Ebner.
The family has certainly been quick to throw Barnevik to the wolves. As soon as the scandal broke, the Wallenbergs dumped Barnevik as chairman of Investor. "I find these levels of compensation completely unreasonable, and part of the money should be paid back," said Jacob Wallenberg, who serves as Investor's vice-chairman as well as a member of ABB's board. Jacob says he only recently learned "the complete picture" of Barnevik's deal. But shareholders are going to be asking what else is in Investor's closets. It may not be Enron Corp., but this scandal is shaking up Corporate Europe. By Stanley Reed in London and Ariane Sains in Stockholm