Attack of the Killer Shareholders Upends Cozy German Boardrooms

(Bloomberg) -- After seeing Thyssenkrupp AG lose a quarter of its value this year, shareholders got a welcome respite on Friday when the company’s stock shot up by more than 20 percent—the biggest gain ever. They can thank activist investors, who had long advocated a breakup of the German conglomerate, for the windfall.

“It is clear that Thyssenkrupp’s strategy of the past has failed,” says Lars Förberg, founding partner of Cevian Capital, an activist fund that had demanded that the company spin off its profitable elevator unit. “A fundamentally new direction is urgently needed to give the company’s businesses a future.”

The shift at Thyssenkrupp is the latest episode in a drama that’s shaking up executive suites across Germany. At Bayer AG’s annual meeting on April 26, investors hit management with a stinging rejection. And in February, a long-simmering feud between Uniper SE and its largest shareholder ended with the resignation of the power company’s two top executives.

“Shareholders are increasingly making use of their powers,” says Jörg Rocholl, president of the European School of Management and Technology in Berlin. “There’s a growing nervousness at companies that support from investors may no longer be guaranteed.”

The backlash runs counter to the consensual culture that’s been the bedrock of the German economy. The country has a two-tier system, consisting of an executive board that runs the company and a supervisory board that hires senior managers, sets their pay, and signs off on major decisions. To ensure that employees’ interests are accounted for, half the supervisory board is stacked with worker representatives, a form of cohabitation designed to moderate the slash-and-burn instincts of capitalism’s most ardent adherents.

Though the shift is a long way from the resistance American CEOs can encounter, it’s a rude awakening for companies long shielded by Deutschland AG, or Germany Inc. That web of cross-shareholdings and interlinked boards—often with major stakes held by banks and insurers—served as a bulwark against outside pressure. Since 2000, when Germany abolished a steep tax on corporate asset sales, those ties have unraveled. As the financial heavyweights sold their stakes in the nation’s companies, that opened the door to outsiders seeking higher returns, streamlined structures, and a seat at the table.

Increasingly, investors are expressing their displeasure via confidence votes at annual shareholder meetings. For decades, these votes—required under German regulations—would end predictably no matter how much vitriol might have been hurled at the dais throughout the day: shareholders typically approved the executive committee by margins that wouldn’t look out of place in the Soviet politburo. But at this year’s Bayer meeting in a vast conference center on the banks of the Rhine, a majority of shareholders declined to support management, an unprecedented rebuke.

“The era when boards could expect AGM approval votes of more than 90 percent is over,” says Ingo Speich, head of sustainability and corporate governance at Deka Investment, which manages $317 billion in assets. “Shareholders increasingly use AGMs to express their unhappiness.”

While the votes aren’t binding—Bayer’s board continues to support Chief Executive Officer Werner Baumann—even a modicum of opposition has led to defenestrations. In 2015 the co-CEOs of Deutsche Bank AG, Anshu Jain and Jürgen Fitschen, won just backing of 61 percent at the AGM. They left their jobs within a month.

Now, all eyes are on the bank’s meeting in Frankfurt on May 23. After the collapse last month of merger talks with crosstown rival Commerzbank AG, a growing chorus wants to hold management accountable for a stock price that’s flirting with all-time lows. Institutional Shareholder Services Inc. and Glass Lewis—the world’s biggest shareholder advisory firms—have recommended that investors vote against Deutsche Bank’s management and supervisory board, citing the falling stock price, legal challenges, and a continued culture of risk-taking.

“At a certain point, shareholders should make their concerns heard,” ISS wrote on May 7. “Votes against the management and supervisory boards are warranted as a precautionary measure considering the substantial monetary and reputational costs to the bank.”

The changes reflect a two-decade campaign to shore up corporate governance in Germany. In 2001, a government-backed commission introduced a set of recommendations that include directives such as requiring a two-year “cooling off” period before a retiring CEO can move into the post of chairman. But lawmakers suggest caution as increased investor activism can mask the true intentions of the militants and put other stakeholders at risk.

“There is no doubt that shareholders are gaining in importance,” a critical tool in reining in wayward managers, says Heribert Hirte, a lawmaker from Chancellor Angela Merkel’s Christian Democratic Union. “But this shift can create problems because the motives driving shareholder activism aren’t always clear.”

Some German companies are trying to get out ahead of any potential activists. Siemens AG on May 7 said it will split off its massive energy business, one of a series of steps aimed at turning the once hulking conglomerate into a more manageable entity. In no small part, the company is seeking to avoid the fate of rivals such as General Electric Co.—the erstwhile industrial stalwart that has fallen from grace—and Switzerland’s ABB Ltd., where management has been locked in a protracted fight with investors demanding swifter change.

“Size isn’t a value in and of itself, but adaptability is,” Siemens CEO Joe Kaeser said after announcing the revamp. “Otherwise, the dinosaurs would have never gone extinct.”

--With assistance from William Wilkes, Tim Loh, Oliver Sachgau, Steven Arons, Naomi Kresge and Birgit Jennen.

To contact the reporter on this story: Benedikt Kammel in Berlin at bkammel@bloomberg.net

To contact the editor responsible for this story: David Rocks at drocks1@bloomberg.net

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