German investors increase their engagement with firms

Relations between shareholders and company boards have undergone some fundamental changes, making them a lot less comfortable.

When major shareholders of Infineon Technologies threatened not to re-elect Klaus Wucherer as chairman in February, commentators dubbed it a “sea change” in ­Germany’s investment landscape.

It was the first such event at a DAX 30 ­constituent’s annual meeting, and a “seismic shift in Germany regarding shareholder activism,” according to Ken Altman, founder of proxy solicitation firm Altman Group.

But shareholders actually involved in the rebellion suggest it is “just the beginning“. They say speaking out in public might be “a good proxy for engagement, but it is the tip of the iceberg in Germany”.

Facing dissent of 27.5% and an alternative candidate for his position, Wucherer agreed to remain for just one more year. The promise saved him, said one investor.

A far less ‘cozy’ relationship is forecast this year between German corporate managers and their investors who are increasingly using public podia to demand better ­corporate governance, if more cordial private discussions have failed.
For 2011, a key battleground for engagement will be companies’ supervisory boards (Aufsichtsrat), prominently their structure, remuneration, election and expertise.

George Dallas, director of corporate governance at F&C, says German companies are neither better nor worse run on average than European rivals, but there is room for improvement.

The next set of their annual meetings are, in some cases, the first chance for investors to vote after a long period observing their company against provisions in Germany’s Corporate Governance Code, as updated in mid-June 2009. These are in part the domestic heavyweights: DWS Investments, Allianz Global Investors, DekaBank and Union. But they have been joined by F&C and by ­institutional manager Hermes, which brings into play money from global pension funds.

Furthermore, Swiss asset manager Vontobel, with €53m in German equities, recently engaged Hermes Equity Ownership Services to provide proxy voting and ­engagement services for its Global Responsibility and Global Trend equity funds.
DWS Investments board member Christian Strenger adds there are also institutional players, including ­Norwegian and US pension funds, “who you might not see in public, although they make their presence felt.”

German fund body the Bundesverband Investment und Asset Management says engaging on behalf of investors is a duty for fiduciaries. Thomas Richter, its managing director, says: “Taking note of investor rights through mutual funds is, for us, obligatory. Only when we practice and interpret broadly our fiduciary duty can we count on the lasting trust of investors.”

Claus Gruber, co-author of DWS’s investor corporate governance policy, says: “If you are a company that makes money from engagement, speaking out publicly may also be good marketing. But for us, it primarily shows clients that we are doing what we should do.”

One important issue around the growth in the practice in Germany, however, remains unresolved – whether it actually benefits investors. It is difficult to isolate whether any gains come from having told managers what needs to be done, or from the general ­economic conditions.

One study suggested compliers enjoyed a 9% price premium to non-compliers. Whether or not Germany’s Code causes shares to rise, it is already forcing boards to act, says the Altman Group, which notes an “aggressive approach to implement recommendations throughout Germany”.

A key requirement for companies this year will be to heed investor concerns about their supervisory boards, groups of individuals chosen by shareholders to promote investors’ interests, oversee the management committee (Vorstand) and hire and supervise executive directors and the chief executive.

Voting changes

In practice, not all boards are this way, investors say. Dallas says he has nothing philosophically against Germany’s two-tier system, but communication between Aufsichtrat and Vorstand can “in some cases be less than robust.”

Strenger says: “Many boards are not well enough set up in quality terms. In public sector institutions, still 90% or more are coming from the political side, which is an open invitation for future disasters, as there is very little idea about the key business issues on such boards.”

The internationalisation of German companies’ activities might be reflected in the make-up of senior management, one investor added, but not yet in supervisory boards. A potential shortcoming is if directors only putting themselves up for re-election once every five years becomes the default option.

“Voting is often a fairly crude way of communicating messages to companies. If we cannot vote annually, it takes away an ­important communication tool.”

Some shareholders have even been willing to criticise government initiatives over supervisory boards. Hermes wrote to managers at major German companies in 2009, saying it thought a new law banning executive board members from switching to their group’s supervisory boards for two years was “not helpful”.

In its letter, seen by InvestmentEurope, Hermes suggested that it would use an opt-out clause which would, in effect, allow appropriate executive board members to switch to supervisory boards earlier. Hermes wrote: “The mandatory waiting period will lead to valuable experience and relevant knowledge being lost for the work of the supervisory board and its efficiency being weakened rather than strengthened.”


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