While the largest German conglomerates are wary of the spectre of activist investors, mid-sized listed companies are not as concerned as they should be, according to two advisors addressing the Mergermarket Germany Forum in Dusseldorf last week.
Forcing the break-up of large conglomerates is considered a key investment tactic of US-based activists, noted Gilles Mentre, Lazard Managing Director and member of the investment bank’s Shareholder Advisory Group that specialises in activism defence.
It is only a matter of time before European conglomerates become targets in the same way they are in the US, Mentre said.
“Some of the large conglomerates in Germany are under pressure,” Noerr partner Michael Brellochs said.
The prospect of break-ups was also being driven by proactive executives seeking to manage their portfolios, before it is forced on them by shareholders, Brellochs said.
Despite the wariness at the top end of the market, many boards are still not adequately prepared, Brellochs said. “Mid-sized companies sometimes get caught,” he said. “Many of them are not really aware and don’t put enough emphasis on this topic yet,” he added.
However, break-ups are not always the answer, Brellochs said, noting that companies sometimes merely need to better communicate their existing strategy to the market and key investors.
Companies need to look at themselves more critically from an investor’s perspective, Mentre said. He suggested companies do their own activist-style “white paper” analysis and consult with their top shareholders over their potential criticisms.
To that end, European companies need to evolve more of an open-door policy for shareholders to share their views, they said.
A 2017 amendment to Germany’s Corporate Governance Code now dictates that the chairman of a German company’s supervisory board should be available “within reasonable limits” to discuss supervisory board-related issues with investors.
“Shareholder communication and shareholder management are key”, Brellochs said.
Institutional shareholders cooperating with activists
Mentre also gave an insight into the kind of typical interaction between institutional and activist shareholders which can have an impact on a company.
A portfolio manager who has held a long-term stake but may be increasingly frustrated with the company, and under pressure to deliver returns, might share his views with an activist in the hope that the activist would create a positive change, he said.
In addition, the governance team of passive funds are growing and becoming more receptive to everyone in the market, including activists, he said.
Shareholder turnout at the AGMs of large German corporates is typically between 60% to 65%, so an investor hoping to force a vote for change only needs a relatively small stake to have an influence, Brellochs added.
The impact of institutional shareholders is compounded by the influence of proxy advisors like ISS and Glass Lewis which sometimes support activist campaigns, meaning an activist can create significant momentum holding just a few percent in voting rights, Brellochs said.
Investors in Germany and across Europe are increasingly looking at corporate governance issues such as executive remuneration and ESG compliance measures, the pair agreed in response to questions from the Dusseldorf audience.
Activists might also challenge the remuneration system together with proxy advisors or institutional investors, Brellochs said. Several large companies have been subject to such protest votes against remuneration in recent years, he said.
by William Mace