Business | Features
The rise of foreign investors in Europe
Changes in ownership are forcing European companies to change how they run their businesses
- By Richard Milne, Financial Times
- Published: 00:00 March 3, 2010
When Infineon faced a shareholder rebellion earlier this year, a look at its share register would have provided the German chipmaker with a bracing reminder of the new reality in European capitalism. None of its 10 largest investors was German.
Instead, the owners of at least 40 per cent of the company were US, UK, Norwegian and French funds. That was in sharp contrast with 1999, when Infineon was owned by Siemens, the German industrial conglomerate, which gradually sold down its stake — to foreign investors.
In a shift that represents perhaps the single most important change in European capitalism in the past decade, domestic owners of companies are being replaced by foreigners.
That in turn is having a profound effect on how European companies are run and how they behave — pushing continental groups to adopt practices more common in the United Kingdom or United States. The role of foreign investors agitating for change is likely to come in for renewed attention as the annual meeting season kicks off in Europe in earnest this month, with confrontation particularly likely over executive pay.
"There has been a massive rebalancing of the ownership structure of companies in Europe in the past 10 years. That has wide-reaching consequences," said David Haines, the British chief executive of Grohe, the German company that is Europe's largest maker of bathroom fittings.
Grohe used to be listed on the Frankfurt stock exchange but was bought out in 2000 by foreign private equity owners. Haines added: "Foreign capital has brought in a single-minded focus that is sometimes less understood on the continent. But it is a two-way learning process."
That last comment hints at how investors have also had to fit in with the continental European model, with its stress on paying attention to all stakeholders, including workers and customers, rather than the British and US focus on shareholders. The financial crisis has also emboldened critics of the move towards Anglo-Saxon capitalism, as it is often called on the continent.
Ownership trends
Still, the shift in ownership has been deeply felt across Europe. Foreign investors own 37 per cent of listed European companies, according to the Federation of European Securities Exchanges, whereas they held only 29 per cent in 2003.
Domestic fund managers and banks have seen their share over the same period fall from 32 per cent to 27 per cent.
The change in some countries has been more dramatic.
In France, non-domestic investors have almost doubled from 1995 while the United Kingdom and Germany have seen near-tripling in their numbers. In contrast, Spain and Italy are among countries that have seen little increase in recent years.
The vast majority of the foreign investors are institutional shareholders from the United States, the United Kingdom and other European countries. But there is a high proportion too of hedge funds, with estimates in Germany that they hold up to 20 per cent of the free float of blue-chip quoted companies. In addition, and not reflected in the FESE figures, is an increased presence of private equity.
All this has come as shareholders acted to diversify out of their home markets while domestic banks and industrial companies in countries such as Germany and France shed some of their equity holdings.
The impact has been wide-ranging.
"It is stimulating change. From the perspective of companies, you cannot separate the increase in the level of foreign shareholders from the higher level of corporate governance. Companies are making a big effort to understand who their shareholders are and even to avoid becoming a target for activist investors," said John Wilcox, former head of corporate governance at TIAA-Cref, a large US investor, now of the consultancy Sodali.
The big changes include a greater say from investors on issues such as pay as well as board composition.
"The governance system has developed dramatically — there has been an increase in transparency and the degree of reporting needed," Hans Wijers, a former Dutch economy minister who now runs Akzo Nobel, the world's largest paint group, said.
Companies are being forced to engage with shareholders in a way they never did before and explain decisions fully — or feel investors' wrath.
"New York used to be an after-thought for a company like Siemens. Now they go there on investor roadshows before even Frankfurt because that is where the action is," said a former fund manager of a big US investor.
Many European companies have sold businesses and restructured themselves under the pressure of foreign investors.
Svein Richard Brandtzaeg, chief executive of Norsk Hydro, relates how his company divested itself of its oil and gas and fertiliser divisions in recent years to focus on aluminium. In the next breath, he describes how after visiting London he is due to go to New York, Boston and San Francisco — a twice-yearly ritual to meet the owners.
Some of the most radical change has come at the behest of activist shareholders such as The Children's Investment Fund, one of London's most aggressive hedge funds, which caused the break-up of ABN Amro in the Netherlands and the ousting of the chief executive and chairman of Deutsche Borse in Germany.
Jan Maarten Slagter, director of the VEB retail shareholders' association in the Netherlands, said the fact that Dutch companies are more than 70 per cent owned by foreign investors "has a huge benefit. Dutch companies have more liquidity than others. They are also being forced to get their acts together, like you saw at ABN Amro."
The ABN Amro and Deutsche Borse affairs may predate the recent crisis but — as shown at Infineon and in activist moves against companies such as TNT of the Netherlands and France's Accor — aggressive shareholder behaviour is far from dead.
That is likely to carry on as European shareholders become more assertive themselves.
"Unfortunately, there are traditions in many countries of ignoring shareholders," said Wilcox, adding that the remark applies to the United States as much as Europe.
However, the impact has not just been on companies. Foreign owners of companies have been forced to adapt to local norms.
Haines points to the big role in many European countries of works councils, on which employees are represented.
In Germany, they take half the seats on the supervisory boards of big companies, giving them a huge sway over decision-making.
"I wouldn't design the system if I had to do it again. But it is working very well for us. The workers have supported all of our decisions. Yes, the discussions were very hard and yes, they didn't always share our views, but they were enormously helpful," Haines said.
The close co-operation helped Grohe to avoid firing workers but still cut costs.
Humility
Foreign investors have also become more humble, realising that the overwhelming focus on shareholders is not necessarily the best model for every-one.
"I think there is a great awareness that other models make sense. There is no one-size-fits-all for companies," Wilcox said.
Investors are even starting to fret that the crisis may put into reverse the rise of foreign ownership. Slagter points to Dutch pension funds reducing the number of companies in which they invest and potentially how much they invest abroad.
"We may now start to see a backlash," he said.
Some believe that the crisis serves as a vindication for the continental approach. Haines, with two US private equity groups as owners, is a convert: "You will see that the best companies are the ones that behave fairly to all stakeholders. Those with an overfocus on any one have tended not to do so well. That plays to continental European strengths."
However, as Infineon and its shareholder rebellion suggests, that will not be enough to silence investors. In particular, two battlegrounds are emerging for the coming years: the nomination of board members and pay.
Infineon was an example of the former. Investors were upset with a proposed chairman who had been on the supervisory board for a decade, a period when Infineon had almost gone bust.
Led by Hermes, a British pension fund, they mounted a rare proxy fight against Klaus Wucherer, Infineon's preferred candidate.
The outcome of their campaign has much to do with Wucherer's reaction. First, he flew to the United States to meet his largest investors. Then he agreed to serve just one year out of his five-year term, a climbdown thanks to investor pressure.
Willi Berchtold, the Hermes candidate for chairman, told friends: "I don't think there will be too many cases like this, because you need a company where shareholders are totally fed up and a candidate prepared to risk a lot, like me. But it should lead to a huge discussion inside German companies over how they nominate board members and how they consult shareholders."
Change is likely to be slow, however, as many companies still have "reference shareholders", particularly families, which protect them from the full force of institutional investors.
"In today's market, there is an increasing short-termism driven by institutional investors. You are never better than your last quarter," said Borje Ekholm, chief executive of Investor, the investment vehicle of Sweden's Wallenberg family.
"A lot of companies are looking for a long-term shareholder who can stay with a company."
Investor, however, has been unafraid to sell out to foreigners, offloading big stakes in companies such as OMX and Scania to US and German companies.
Jacob Wallenberg, Investor's chairman, disputes some of the terminology as increasingly meaningless in Europe.
"We do not see our companies as domestic. We see them as global," he said, pointing out that about 90 per cent of sales of Investor-backed companies are made outside Sweden.
Confrontation
Pay is becoming more contentious as well. Companies such as Volvo, Carrefour and Philips have all been forced to rethink their pay policies in recent years amid investor dissatisfaction.
The season of annual meetings is likely to see more confrontations similar to that at Royal Dutch Shell last year, where shareholders voted down its remuneration policy.
Wilcox said companies need to see annual meetings less as an ordeal and more as a chance to gauge the opinions of shareholders.
"Companies need to do things more systematically. There is a tendency to deal with problems only when shareholders are angry and banging on the door."
For all the conflict, most observers believe Europe is still changing the way its companies behave, albeit in its usual incremental manner. For Haines, that is not a problem, as Europe blends its own model with the Anglo-American approach.
"It is a slow-burn change. But I'm not sure that's a bad thing. We balance our change, we do it in moderation and we don't flip-flop."
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