One manager's crusade
Corporate governance and better investor relations have become some of the main buzzwords for listed companies and investors in continental Europe.
But there is much discussion without coming to the point. Commissions hold dozens of meetings and statements are made without any commitments. Especially in Germany, the concept that the management has to serve the investors and not vice versa and that the share price reflects the quality of the company are still far from being as widely accepted as in the UK and the US. Further changes towards investor orientation are underway, though - a process that is in no small part enforced by institutional investors. Among them are fund managers looking for first class selections for their portfolios on behalf of their investors. After all, fund managers represent a weighty voice on the German capital market as in the 1990s the share of institutional investors in the market capitalisation of the german stock market doubled from 17 to 33%.
Thus, understood as a strategy which in the long run maximises the value of a company, shareholder interests and the accompanying quality criteria must be central for fund managers. We act in a decisive way to ensure that quality criteria apply and only first-rate shares are bought for the investors. As major shareholders, fund managers have to safeguard investors’ interests by bringing their influence to bear on companies who act against principles of good corporate governance and sanction them.
The key essentials which are observed and enforced by fund managers are the principles one share one vote, a fair remuneration for the management and a competent supervisory board. Also, important is that companies deliver transparent segment reporting and the auditors avoid any conflicts of interest. Of course, we welcome shareholder-friendly guidelines, transparent and internationally comparable book keeping, multilingual publication of reports, and efficient investor relations meetings as these help the fund manager and analyst to assess the value of a company, especially in the case of smaller and medium-sized companies. A ‘1 and Fair View’ and the delivery of relevant and timely information are helpful for the investor. We are convinced that it is more important that the companies follow these essentials than to pursue a range of issues which are of minor interest only.
The commitment to increasing shareholder value through a long term approach has a central objective of overweighting of a stock in our funds. To increase value of the company and the management within a time horizon of five to 10 years, institutional investors have to enforce a better corporate governance. The accounting scandals and the poor management of major companies proved that action is necessary. So it is up to the shareholders to enforce better management principles. The alternative could be more rigorous laws. But more interventions by state authorities is only second best approach.
Union Investment is responsible for E110bn of its investors’ money, of which E30bn are invested in equities. In order to make sure that only premium titles are in the portfolios, we enforce good corporate governance in listed companies. As an independent player in the financial market we are able to criticise companies in the public if necessary.
Quality criteria which are applied to stock selection combine demands on good management and professional investor relations. If companies are poorly managed even strong investor relations will not convince the investor.
o Clear long-term strategy: Only a clear strategy generates profits. Maximising capital gain must be the highest maxim.
o Focus on core competences: Focussed companies maximise competitive advantages. Unprofitable activities should be terminated.
o Performance-related pay: If the payment is linked to the long term performance the management interests coincide with the interests of the shareholders.
o Comprehensive reporting: The long-term strategy has to be accompanied by open communication which is detailed, transparent and timely.
o Segment reporting: A separate reporting of the various segments helps to verify the focus on core competences. So every segment has to prove that it achieves an adequate return on investment.
o Acting in the best interest of shareholder: If capital is not adequately used, shares should be bought back.
We can speak up directly for our investors and act in their interest, as we do by attending annual meetings and holding individual talks with companies. One claim is: One man, one vote - one share, one vote. So regarding Volkswagen, for example, we demand that the superior voting rights of the state of Lower Saxony should be abolished. Corporate interlocks should be reduced, as they hamper the shareholder’s power.
Last year, we attended several general meetings to represented our investors. One example is MLP, where we complained about the creative accounting practices of the company. And at the annual general meeting of TUI, we expressed doubts about the general strategy. Both companies’ shares underperformed the respective industry sector considerably.
But even without attending AGMs, we executed our voting rights on behalf of fund-owners’ interest. So we rejected the proposal to appoint the former CEO Albrecht Schmidt as head of the supervisory board. The proposed salary-hike for the supervisory board of DaimlerChrysler was rejected by our fund managers as well.
We also continued to expand our corporate governance campaign outside Germany into Europe. Because of the ongoing underperformance, our representatives visited, for example, the AGM of Alcatel in Paris and proposed the group concentrate on the profitable operations and to get rid of the cash burning activities.
Rolf Drees is head of communications at Union Investment in Frankfurt