09.01.05
When Governance Engagement Works: Fresenius Re-visited – September 1, 2005
The efforts of a small group of active investors attempting to engage Fresenius on that company’s proposed reorganization appear to have borne fruit. Although the group, led by the U.K.’s largest pension-fund manager, Hermes, apparently had no chance of actually derailing the transformation of Fresenius into a quoted, limited partnership (KGaA), they were important enough and credible enough to be able to persuade the company to make some important modifications in its proposed new structure. These changes were approved by the shareholders at the company’s Extraordinary General Meeting in Frankfurt on Tuesday. This case clearly illustrates the utility of investors engaging in a continuing dialogue with a company’s board and senior management, rather than simply voting their shares against something they find objectionable.
Hermes, working together with the Netherlands’ largest pension fund, ABP, had been in discussions with Fresenius since the end of July, after the company proposed the reorganization, with its attendant loss of shareholder rights. Although initially the effort seemed doomed, as the company’s dominant shareholder, a family foundation (Stiftung) was determined to hang on to its absolute control of the company without participating in any likely equity capital-raising, Hermes continued discussions, while at the same time attempting to rally other shareholders to its side. The foundation needed to ensure that it would have 75% of the votes cast at an EGM called for the purpose, which was probably why they decided to call the meeting for the end of August, when the European vacation period is at its height. This timing, during the notoriously absent-minded month of August, also endangered the minority shareholders’ campaign, as it often proved impossible to even discuss the initiative with key decision-makers among the various institutional shareholders. After a major conference call in mid-August between Hermes’ negotiators and Fresenius’ controlling shareholder ended with nothing resolved, the situation looked bleak.
But the negotiators persisted, hinging their arguments on the fact that under the limited partnership, shareholders would no longer have any power of review over board decisions made during the previous year. The company was willing to continue talking, knowing that it was discussing these matters with important shareholders like Hermes and ABP, and with the threat of CalPERS voting against the change as well. They also knew that Hermes and ABP would show up at the EGM, and speak against the transformation, which was not exactly good publicity for the company. As the discussions came down to the wire, proposals for some kind of special structure were mooted, and voilà !—a compromise was found: the board’s Audit Committee, already composed of a majority of independent directors, would have responsibility for overseeing governance, and would have to report to the shareholders (i.e., the limited partners) each year, at the AGM. This change is not as cosmetic as it sounds, for one of the few powers the limited partner-shareholders in a KGaA have is to accept or reject the report of the Audit Committee. At the EGM, Hermes introduced the motion for these changes, it was supported by management and the Fresenius foundation, and that was that.
German press reaction, normally critical of attempts by shareholders to assert their rights, was very supportive in this case. A confrontation was headed off, some common ground was found, and while the controlling Stiftung was allowed to extend its control in perpetuity without buying the company back from shareholders, the principle of some accountability to shareholders was maintained. More importantly, perhaps, the dissidents were seen as behaving responsibly, with attention to the best interests of the company, and not as the ‘plague of locusts’ one prominent Social Democratic politician complained about a few months ago. If this was not a thumping triumph for the cause of shareholder rights, at least it was a demonstration that a group of well-known foreign investors with a legitimate complaint could successfully negotiate with a German management without being pulverized by the advancing Panzer divisions of Deutschland AG.
What are the lessons from this case? One is that it helps to be a large investor, known for its corporate governance activity. The stakes of Hermes and ABP were not large enough per se to compel company attention, less than 2% in each case. But their reputations as influential and concerned investors were significant, and that, coupled with their willingness to engage in a sustained dialogue with the company, was sufficient to keep the talks going. Another lesson is that principled and purist opposition is frequently not enough. Those institutions simply determined to vote ‘no,’ as they were advised by the various proxy advisors and shareholder associations, in the end had little or no effect upon the outcome. Those willing to engage were able to have some pratical effect.
Corporate governance is fortunately not usually about power politics. If it were, the only successful governance initiatives would be those led by a raider with a multi-billion dollar credit line, and a team of bailiffs willing to enforce any court orders it might obtain. Most companies know much better than to get into an open fight with their shareholders, unless management believes that it is fighting for its survival, and sometimes not even then. But the shareholder requests must be reasonable, those negotiating must have credibility and a reputation for responsibility, and the company must realize that its own reputation is likely to be at risk if it refuses to negotiate in good faith.