BRUSSELS, Belgium - The European Commission should enlist 15 to 20 blue-chip companies to subscribe to corporate governance guidelines advancing shareholder rights, an influential European think tank concludes.
The recommendation - from a working party of the Centre for European Policy Studies, Brussels - comes as shareholder activists across Europe are starting to flex their muscles. In recent weeks, investors have challenged management practices at companies ranging from British Gas PLC to Nestle S.A.
The working party urges a bottom-up approach to achieving European Union-wide corporate governance standards. (The working party includes academics, bankers, investment experts and corporate and government officials.)
Past efforts at adopting European legislation to promote governance - in particular a measure to create Europeanwide companies - have bogged down in political squabbles.
In the face of continued financial market liberalization, greater use of advanced-funded pensions systems and further privatization of state-run functions, there's a growing need for clearer corporate governance rules across Europe, according to the report.
"There's an urgent need to do something," explained Karel Lannoo, a research fellow at CEPS who prepared the report.
A bottom-up approach - enlisting key companies rather than imposing legislation - may be more appropriate and could be implemented faster than a five-year wait for European legislation, he said.
The group proposes adoption of corporate governance guidance that the European Commission or perhaps the Federation of European Stock Exchanges can present to their members, Mr. Lannoo said. The report suggests a company-driven approach could speed up eventual adoption of Europeanwide legislation, rather than impede it.
In devising a proposed corporate governance code, the working party came out with a much less rigorous model than found in the U.K.'s Cadbury Code or principles advanced by U.S. shareholder groups.
Still, the code would advance shareholder rights in Europe, where shareholders often are viewed as suspect.
Key points in the guidelines include:
Shareholders should be able to exercise their voting rights. The one-share, one-vote rule should govern unless shareholders give their approval.
Basic rights of shareholders include appointing and removing board members and auditors, approval of corporate dividends, approval of the bylaws, and authorization of share issuance.
Minority shareholders should be treated fairly, especially in takeover situations.
Shareholders' responsibilities include respecting "a corporation's need for long-term growth and stability." The code emphasizes that major shareholders should take a significant role in this respect.
There should be "a sufficient number" of independent directors "to exercise objective oversight over management," but the code falls short of calling for a majority of outsiders.
In contrast to U.S. and U.K. shareholder demands, the guidelines do not address whether there should be separate audit and compensation committees composed of independent directors. The report, however, does say outside directors should take "a special responsibility" in overseeing the audit.
The report makes a number of broad recommendations, including supporting development of international accounting standards. The working party warns creation of a separate European accounting standard would only strengthen the role of U.S. accounting standards, which is not acceptable to Europeans.
In addition, it urges that a long-delayed European Union takeover directive should be split into two: a securities law directive, to harmonize bid procedures throughout the EU; and a company law directive, to reconcile conflicting regulation of anti-takeover measures.
The report adds the European Commission should crack down on actions that violate the single-market principle. Among them: privatizations that exclude foreign investors.
Despite the lack of progress in the legislative front, market developments are expected to boost the role of equity markets and make corporate governance practices more consistent from country to country, the report said.
"The growing importance of institutional investors in the European capital markets will push corporate governance toward the British/American model," the report said. Indeed, the $80 billion California Public Employees' Retirement System is planning to host this fall two half-day seminars on corporate governance issues in London and Paris.
Andre Baladi, a Geneva-based financier, believes Anglo-Saxon corporate governance principles should take hold in Europe. He serves on the CEPS working group.
He is exploring whether to create a Geneva-based international corporate governance center.
Activism on the rise
While largely unsuccessful, shareholder activism is surfacing across Europe.
A highly publicized battle waged by Pensions & Investment Research Consultants Ltd., a London-based pension consultant, against British Gas' executive pay policies was defeated.
A 71% pay increase awarded last year to Cedric Brown, British Gas' chief executive, set off a huge public debate. Through a shareholder resolution, PIRC sought to have British Gas revise its executive pay policy to meet "best practice."
The resolution won 16.9% of the votes cast; more than half of British Gas shares were voted, a strong response.
The issue had become highly politicized, with Labour Party officials attacking generous pay and incentive plans at British Gas and other recently privatized utilities. While raising Mr. Brown's pay, British Gas had announced plans to lay off 25,000 workers during the next five years and had cut pay for certain employees.
Most institutions supported British Gas management. But there were rumors some major shareholders had worked behind the scenes, warning top management they must get their act together in the future.
What's more, some institutional investors may be more sensitive to a side issue raised during the debate: PIRC charged that Richard Giordano, British Gas non-executive chairman, actually devotes three-quarters of his time to his part-time chairmanship, earning (pounds) 450,000 a year, and thus has a conflict in serving as chairman of British Gas' remuneration committee. Mr. Giordano had responded he was independent in the board's view.
Labour Party officials may try to leverage the British Gas situation. Alistair Darling, Labour's spokesman on financial issues, reportedly said the party would call on institutional investors to vote their shares only after consulting trustees and possibly beneficiaries. What's more, Labour may force money managers to disclose how they vote.
In normally placid Switzerland, activists once again pressed Nestle management to list its stock on the New York Stock Exchange, saying the move could boost the company's price-earnings ratio by more than 20%.
Francois Perroud, head of corporate communications, said Nestle officials like the idea in principle, but do not want to publish financial results under two different accounting standards and are wary of NYSE disclosure requirements.
Mr. Baladi, together with two other Swiss investors, urged Nestle to sell off its 26% stake in L'Oreal S.A., the world's largest cosmetic manufacturer, and divest Alcon Laboratories Inc., its wholly owned U.S. pharmaceutical subsidiary. (Caterpillar Inc.'s overseas pension fund, based in Geneva, previously had pressured the company to improve performance, based on Mr. Baladi's advice.)
Mr. Baladi suggested Nestle could realize between $10 billion and $13 billion from divesting the holdings. Proceeds could be used to finance further food industry acquisitions, boost Nestle's dividend payout, and start a stock buyback program, he argued.
Mr. Perroud said Mr. Baladi has been advocating sale of the L'Oreal stake for five years. He said the holding is strategic. Both L'Oreal and Alcon have been extremely profitable investments for Nestle, he said.
Meanwhile, in France, Banque Nationale de Paris easily defeated a resolution submitted by minority shareholder Elliott Associates L.P., New York, to find ways to shrink the 40% discount on shares in Cie d'Investissements de Paris. CIP is a diversified holding company with stakes in French stocks that is more than 90% owned by BNP.
On the same day, Paris-based oil giant Elf Aquitaine won shareholder support for a bylaws change that would create double-voting rights for long-term shareholders.