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European Boards Under Greater ScrutinySubmitted by: L. Reed Walton, Publications, and Roland Escher, International Research Analyst

Scandals, concerns over control, and heavy losses at several large European firms have led some investors this year to consider voting against resolutions to ratify board actions.

Shareholders at many European companies are asked each year to retroactively ?discharge,? or ratify the actions of, the management and supervisory boards and to indemnify directors against loss or legal action. At most firms, these management proposals are considered routine and pass with minimal resistance. However, at companies like Germany?s Volkswagen and Siemens, and Switzerland?s UBS, shareowners are expressing a greater reluctance this year to sign off on directors? past decisions.

Wolfsburg-based Volkswagen likely will see resistance to its discharge resolutions and board nominees at its April 24 annual meeting. In October, the European High Court of Justice struck down a 47-year-old German law that capped investor voting rights in German companies at 20 percent regardless of equity stake. Dubbed the ?Volkswagen Law,? the measure was primarily intended to prevent a hostile takeover of Volkswagen, Europe?s largest automaker. The law also imposed an 80 percent supermajority requirement to pass proposals at shareholder meetings, and gave the State of Lower Saxony--which owns a 20.1 percent stake in Volkswagen--the right to name two directors to the supervisory board.

Expecting the court ruling, Porsche--the German-based luxury automaker--increased its stake in Volkswagen to 31 percent, beginning in 2005, and said in January it would seek a majority stake to keep the company largely German-owned, the Associated Press reported. Porsche?s shareholders approved the strategy at a special meeting in March. Volkswagen also nominated Porsche?s chairman, Wolfgang Porsche, to the supervisory board at Volkswagen. These moves have drawn fire from investor groups who claim that management has allowed Porsche to gain control of the Volkswagen board with little resistance.

Vereinigung Institutionelle Privatanleger (VIP), a European association of institutional shareholder groups, on April 10 filed a counterproposal to Volkswagen?s discharge requests. The group complains that the company has done nothing to follow up on the ?Volkswagen Law? court decision, nor has it endorsed either of two shareholder proposals to modify company practices in accordance with the ruling. Those proposals, one submitted by Porsche, and the other by Hannoversche Beteiligungsgesellschaft--the holding company for Lower Saxony--will be voted on at Volkswagen?s meeting.

Porsche is asking the company to scrap the 80 percent requirement. That move is opposed by Volkswagen?s works council (labor union), which has 10 representatives on the 20-member supervisory board. One of these labor representatives, director Bernd Osterloh, has denounced the actions of Porsche CEO Wendelin Wiedeking (also a supervisory board member), calling him a ?Napoleon,? news reports indicate. Company insiders say that Volkswagen chairman Ferdinand Piech plans to oust Wiedeking to preserve his expansive powers at Volkswagen and maintain union strength, German newsmagazine Der Spiegel reported in March.

Lower Saxony has submitted a competing proposal that would retain the supermajority standard. This measure is opposed by Deutsche Schutzvereinigung für Werzpapierbesitz (DSW), which represents individual German investors and called the ?Volkswagen Law? in any form an ?anachronism,? the Associated Press noted.

In January, the German Ministry of Justice drafted new legislation that would end the voting rights cap but would keep the 80 percent supermajority rule and require shareholder approval of any plant relocation or construction. On April 14, European Commission Internal Markets Commissioner Charlie McCreevy sent a letter to German Justice Minister Brigitte Zypries, warning her that the supermajority requirements would not pass EU scrutiny. ?All [the] provisions ? need to be abolished in order to implement the ruling correctly,? McCreevy wrote.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on April 18, 2008 (boomark / email).