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Culture Shock For Europe's Boards (Int'l Edition)


Business Week International Finance: INVESTORS

CULTURE SHOCK FOR EUROPE'S BOARDS (int'l edition)

Since Maurice Saatchi's ouster as chairman of British ad giant Saatchi & Saatchi Group, many European managers have been gleefully scolding the American investors who engineered the coup. Key company executives have followed Maurice out the door, and several major clients have placed their accounts in review. That's what you get with your noisy Yankee activism, say these traditionalists. "This is the worst case of corporate governance I've ever seen," thunders Stanley Kalms, chairman of British retailer Dixons Group, which may yank its account from Saatchi.

But European boards are mistaken if they think the Saatchi uproar will dampen shareholder activism in the Old World. All over Europe, pension funds and other institutions are forming pressure groups to challenge deals they don't like and grilling boards over decisions that erode share prices. In the last year or so, shareholders in France, Germany, Sweden, and Switzerland have all voiced their ire--and often recruited foreign allies such as America's giant TIAA-CREF teacher retirement fund. "The concept of corporate governance is arriving very fast in Europe," says Colette Neuville, a French investor activist.

GLOBAL CASH HUNT. These agitators are intent on changing traditional shareholder relations in Europe, where companies have long enjoyed cozy ties with government and corporate elites. Today these corporations answer more to a global shareholder base that has no loyalty except to the best return. "Traditional sources of capital have dried up for many companies, forcing them into the world's equity markets," explains Stephen M. Davis, who tracks the overseas holdings of U.S. investors for the Investor Responsibility Research Center in Washington, D.C. In Britain, for example, U.S. investors hold 20% of all securities.

This need for global money will just crank up the pressure on European companies. In February, European, Canadian, and Australian institutional investors will join with their American counterparts to create a global organization to monitor corporate governance. Together these groups control $2 trillion in securities.

The concept of shareholder rights has emboldened once timid investors in Sweden, where a stockholder revolt killed Volvo's merger with Renault. Another example: the collapse of investment bank S.G. Warburg Group's proposed merger with Morgan Stanley & Co. late last year. After minority shareholders in a Warburg fund management subsidiary demanded a cash premium before swapping their shares, Morgan abruptly walked away. "British companies are likely to see more activism from shareholders no matter where they come from," warns Alastair Ross-Goobey, who manages Britain's $40 billion telephone and postal-service pension fund.

VOTING POWER. The trend has even reached staid Switzerland. There, nasty boardroom battles are front-page news as the largest bank, Union Bank of Switzerland (UBS), tries to neutralize one large, pesky holder, Martin Ebner. He's pushing for board changes, claiming UBS shares have underperformed the market. In an ironic twist, Ebner can press his attack only because he holds shares with extra voting power that are reserved for Swiss citizens--the kind of privilege activists often attack. Now UBS is fighting back with plans to give all shares the same voting rights.

In France, companies are finding it tougher to ignore the brushfires lit by activists. Neuville's Association for the Defense of Minority Shareholders is talking to several French companies about setting up audit and remuneration committees, with small holders as members. After unsuccessfully protesting the terms of last year's stock swap between retailer Pinault-Printemps and cataloger La Redoute, she now plans to sue Societe Generale, France's third-largest bank, for offering minority holders in a subsidiary a buyout price she says is inadequate.

The big challenge for shareholder activists is Germany, where banks traditionally vote the shares lodged with them in favor of company management. But things are beginning to change. Last year, Christian Sprenger, the chief of Deutsche Bank's mutual-fund group, appeared at 12 separate annual meetings, including those of Hoechst, Veba, and BMW, to criticize lackluster management--and hand out bouquets to star performers.

None of these investor groups yet wields the kind of clout that has toppled the chiefs of General Motors, American Express, and Eastman Kodak. But give them time: Europe's investor activists have made a promising start. By Paula Dwyer in London, with Stewart Toy in Paris


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