LONDON - Institutional investors led by U.S. shareholders sparked the ouster of the co-founder and chairman of Saatchi & Saatchi, the worldwide advertising agency.
The dismissal of Maurice Saatchi as chairman of the agency holding company that bears his name was a victory for the bold, noisy American brand of shareholder activism so alien to U.K. institutional investors.
At a lengthy Dec. 16 meeting, the board decided to comply with all three demands of the activist institutions, led by U.S. investors, representing 30% of the shares. The board agreed to remove Mr. Saatchi as chairman of the holding company, strip his name from its masthead, and vastly scale down his stock options package. Now the Saatchi name will be retained only by an advertising subsidiary.
Shareholders led by Harris Associates, Chicago; the State of Wisconsin Investment Board, Madison; the General Electric Co. pension trust, Stamford, Conn.; Tiger Management, New York; and London-based M&G Investment Management, had been campaigning for Mr. Saatchi's removal because of the company's financial performance and outrage over his 5 million stock option package.
The stock price has fallen 98% since Mr. Saatchi became chairman nine years ago, as the company incurred a hefty debt burden amid weakening advertising industry revenues.
Adding to the outcry over his pay package, the flamboyant Mr. Saatchi recently was featured in Architectural Digest in one of his four homes.
"It's the American wave. The votes follow the dollars," said Anne Simpson, director of Pension Investment Research Consultants, London. As American money increasingly is being invested overseas, U.S. activism also is making itself known.
While U.K. investors might make their views known before a board meeting, "you wouldn't see the dagger drawn and poised over the victim," Ms. Simpson said.
Richard Hughes, a fund manager at M&G Investment Management, London, which runs 12 billion and owns 5% of Saatchi & Saatchi, said: "Certainly I think there's a demonstration that any out-of-the-ordinary remuneration packages could well be voted down by shareholders even though it may be with regard to a very important person in the business. Newspapers and politicians all want institutions to exercise control in corporate governance. Everyone must accept that ... In the extreme, where pay packages are outside of recognized guidelines, it is appropriate for institutions to have a view."
Stephen Davis, director of the global shareholder service of the Investor Responsibility Research Center, Washington said: "It does mark a new level of shareholder activism in the U.K. by American institutions. It marks a ratcheting up of influence by American institutions."
"It comes smack in the middle of a very vigorous debate in the U.K. over executive pay," Mr. Davis said.
"The Saatchi case adds fuel to the fire in the effort to make board pay decisions far more accountable to shareholders," said Mr. Davis.
Mr. Saatchi is considering an offer to stay on as chairman of one of the group's advertising subsidiaries, Saatchi & Saatchi Advertising Worldwide. The board also offered him joint presidency of the holding company, along with his brother Charles.
In addition, a new stock option package that meets guidelines of the Association of British Insurers, an investor group, was approved at the meeting. The former package - calculated off Mr. Saatchi's old salary of 625,000, rather than his new salary of 200,000 - would have given him a windfall of 5 million in three years if the company's share price doubled in that period.
This is not the first time U.S. institutions have teamed up with British shareholders. In the first trans-Atlantic proxy battle in 1993 at Hanson PLC, the company decided to withdraw a resolution that would have restricted shareholder rights in response to a shareholder campaign led by the United Mineworkers of America.
"The Hanson proxy campaign broke new ground. Saatchi is the long awaited second stage. It's not just a campaign on the issue of shareholder rights but on sorting out a poorly run company," Ms. Simpson said.
Mr. Hughes said U.K. institutions typically take longer to effect changes than their U.S. counterparts but still get the job done.
"The U.K. is still a long way from the American way of taking a more aggressive and public line. We're quite effective but (action) tends to be behind the scenes rather than through the press or the calling of an extraordinary general meeting," Mr. Hughes said.
Whether the public approach was better in Saatchi's case "only time will tell. From (the Americans') point of view it was effective but there are other methods as well," Mr.Hughes said, adding that he hopes Saatchi doesn't lose major advertising clients as a result of the ouster.
Others said the Saatchi situation was unique and won't have a bearing on the future tenor of U.K. corporate governance.
"The concentrated ownership (among a few U.S. investors) is a unique facet of this case ... All you needed was one or two large U.K. shareholders not going to bat" for Mr. Saatchi, said Bruce Babcock, director of research of Institutional Shareholder Services Inc., Bethesda, Md.
"Their quiet system will continue."
But Mr. Babcock did acknowledge that in this instance, the confrontational U.S. approach was effective. "You need a U.S. approach to force out someone who refuses to leave."
Now that Mr. Saatchi has stepped down as chairman, a number of thorny questions remain for the company. Most notable whether, Mr. Hughes said, is the issue of whether big agency clients loyal to Mr. Saatchi, such as British Airways and M&M/Mars, will defect. British Airways reportedly sent a letter to David Herro, senior portfolio manager at Harris Associates, expressing its disapproval over the firm's efforts.
Observers are still waiting to see whether Mr. Saatchi accepts the offer of a diminished role with the company - heading up only the advertising subsidiary - or starts up a new firm, which could attract the name-brand clients.
Ms. Simpson welcomes the U.S. influence on U.K. corporate governance but said it might be viewed as a curse by some British companies: "The black hole called ADRs: does this mean a Boston Tea Party in the making on our own shareholder register?"
Anne Hansen, deputy director of the Council of Institutional Investors, Washington, said the Saatchi case is significant in that an institutional money manager, rather than a pension fund, led the fight.
"It demonstrates how the corporate governance movement is increasingly involving different types of shareholders working together. To us, that's more important than the fact that it's overseas. The cohesion of the movement is what we find of utmost importance. It doesn't happen too often," she said.
Some observers said Saatchi will have a lingering effect on pay packages for directors and executives, especially in light of the furor surrounding other U.K. companies. British Gas PLC recently announced that its chief executive would receive a 75% pay rise, while junior staff wages would be cut,prompting a storm of public criticism. The company is now reviewing the pay proposal.
BOC Group PLC, Surrey, England, recently mailed shareholders an annual report that includes details of the compensation paid to its directors, following the lead of Reuters Holdings PLC, London, and Dixons Group PLC, London. Grand Metropolitan PLC, London, is also reportedly close to providing details about the compensation of its directors.
"Other chairmen or executives will not be so bold. (Saatchi) will be in back of everyone's mind when asking for a 5 million raise," Mr. Babcock said.
