When the first winds of the U.S.-led subprime mortgage crisis began to rattle world financial markets last summer, top executives at Deutsche Bank decided to reach out to investors rather than wait to be approached. On August 1, chief financial officer Anthony Di Iorio outlined the bank’s leveraged finance positions in a conference call with analysts and investors and explained its procedures with regard to mark to model valuation practices. One month later chief executive officer Josef Ackermann delivered a speech at a financial conference organized by German newspaper Handelsblatt in which he discussed Deutsche’s exposure in areas like leveraged loans, subprime mortgages and other asset-backed securities.
The -iconic German financial institution was among the first banks to announce that it would write off subprime--related losses. On October 3, two days after UBS and Citi-group disclosed the first major write-downs, Deutsche reported €2.2 billion ($3.1 billion) in mortgage--related losses for the third quarter, much less than -many analysts expected. Relieved investors drove up Deutsche’s share price by more than 2 percent that day.
“It is important to be early, comprehensive, consistent and transparent,” explains Di Iorio. “One of the things we did that we hadn’t done previously was to arrange meetings with our head of sales and trading. That was not only to tell people where we see our business headed but to give them the opportunity to ask questions.”
Shareholders place a high premium on open lines of communication with the companies in which they invest, especially at a time when uncertainty is roiling markets, and no European bank is more receptive to the needs of its investors than Deutsche, according to participants in Institutional Investor’s third annual survey of Europe’s Most Shareholder-Friendly Companies. The survey reflects the opinions of more than 340 research analysts and port-folio managers at 235 institutions overseeing an estimated $3.4 trillion in European equities. Participants were asked to name the businesses they considered the most shareholder-friendly in the industry sector (or sectors) for which they were responsible. The top-ranked companies in 30 sectors appear in the table on page 46; the complete ranking and methodology can be found on our Web site, institutionalinvestor.com.
European companies have come a long way since the anxious debates over shareholder value in the 1990s, when investors were often treated like little more than an afterthought by many companies. The worldwide credit crunch has businesses engaged in a struggle for capital, and the rise in shareholder activism is compelling many corporate executives to be more open and communicative about their strategic goals. “We welcome any constructive dialogue with investors,” says Di Iorio. “We -listen.”
A.J. (Ad) Scheep-bouwer, CEO of the top-ranked firm in the Telecommunications Ser-vices sector, Netherlands-based Royal KPN, says the “straightforward competition for capital” is prompting Euro-pean companies to rethink how they deal with shareholders. “Bastions like the super-visory boards now respond much better to shareholders because of activists and all these hedge funds and because there are no barriers anymore,” he says.
Communication goes only so far in the midst of the worst credit crunch in a generation. Deutsche shareholders were far more troubled when bank executives announced a second write-down, of €2.7 billion for the first quarter, that included losses for leveraged loans as well as subprime exposure. Lingering fears of the bank’s vulnerability to further losses drove Deutsche’s share price down 30.0 percent year to date through mid-June and cast a shadow over the impressive gains the bank has made in recent years.
A sluggish, underperforming domestic institution when Ackermann took office in May 2002, Deutsche today is one of the biggest global asset managers and investment banks, with net income of €6.5 billion last year, compared with €397 million in 2002. One of the first things the new management team did was to set a goal of achieving a 25 percent pretax return on equity to demonstrate that capital was being employed efficiently. Deutsche’s pretax ROE rose from 10.2 percent in 2002 to 30.4 percent in 2006, slipping back to 29.2 percent last year.
“It’s not about tinkering with this thing or that thing,” says Di Iorio. “Shareholders want to understand what management is thinking about, the agenda and how we can be measured against it.”
Investor awareness of high-growth opportunities in the emerging markets of Asia, Latin America and the Middle East is also increasing the pressure on companies in developed economies to boost performance. Grabbing a piece of that growth is what drove French cement manufacturer Lafarge, No. 1 in Building & Construction, to buy the cement unit of Egyptian building products manu-facturer Orascom Construction Industries for €8.8 billion. Investors applauded, sending Lafarge shares soaring 13.1 percent when the deal was announced on December 11. (The acquisition was completed in January.) “Investors understand that Lafarge is now one of the stocks that is heavily exposed to the developing part of this world,” says Lafarge CFO Jean-Jacques Gauthier.
Two years ago, Lafarge management set out to improve its performance on key metrics by 2010: boosting earnings per share from less than €8 that year to €15, after tax return on capital employed from 9.4 percent to more than 12 percent, and free cash flow from €1.4 billion to €3.5 billion. “As long as we deliver on those commitments, we will keep our shareholders happy,” says Gauthier.
Even if actions — in the form of solid returns — speak louder than words, investors will always be hungry for information, and some companies have been punished for being too taciturn. Take British Land Co., for instance. A few years ago the London-based com-pany was reluctant to disclose details about the terms of leases for property it rents. In response to pressure from activist investors and in anticipation of converting the company into a real estate investment trust, a move that required shareholder approval, British Land launched a transparency campaign, producing quarterly reports and providing details of lease lengths, occupancy levels and a slew of financial metrics. British Land is now Europe’s Most Shareholder-Friendly Company in the Property sector.
“You can never quantify it in terms of share price, but clearly at the time when we began that journey our shares were trading at a discount of 50 percent to net asset value,” says Graham Roberts, CFO of British Land. “That discount closed by the time we became a REIT, in January 2007, to no discount or a marginal premium.”
Erich Hunziker, CFO of Swiss health care group Roche Holding, which leads the Pharmaceuticals sector, agrees that keeping investors informed is key to shareholder happiness. Hunziker says he meets with shareholders “at least twice a week,” and the company also regularly brings investors to its headquarters in Basel to meet the investor relations team and talk with experts about Roche’s work on developing drugs and cancer research. “They have the opportunity to ask detailed questions in oncology,” he says.
When he was named CFO in 2001, Hunziker says, Roche did not show up on the radar screens of most U.S. investors. It had no North American investor relations team, and investors who knew about the company didn’t think too highly of it, largely because it made more money from its investments than from its core pharmaceuticals business. Roche had to learn not only to be more service-oriented in dealing with shareholders but also to ensure the company had positive news to report regarding its efforts to increase sales and reduce expenses. “IR is not marketing activity,” he says. “If your business case is bad, you can’t talk it good with investor relations — that’s a mission -impossible.”
Deutsche Bank
German Bank Makes Return on Equity Its Top Priority
Anthony Di Iorio, who joined Deutsche Bank in 2001 and was -named chief financial officer in 2006, says communicating with shareholders is “a two-way street, where we disclose information on performance, risk, strategy, how we see the business model is going to change. Likewise, particularly in the one-on-one meetings with shareholders, it’s important to hear what they say,” explains Di Iorio, who will retire October 1 and will be replaced by former BMW CFO Stefan Krause.
After hearing investors grouse about the Frankfurt-based bank’s anemic returns, management set a return-on-equity target of 25 percent and made achieving that goal its top priority through strategic acquisitions and other measures. The bank’s pretax ROE increased from 10.2 percent in 2002 to 29.2 percent last year.
“When it comes to return on equity, Deutsche Bank looks very good in its peer group,” says Ernst Konrad, a fund manager at Bayern-Invest in Munich.
Aftershocks from the subprime mortgage crisis continue to shake the bank. It reported a first-quarter net loss of E141 million ($223 million), its first quarterly loss in five years, and in April chief executive officer Josef Ackermann warned that the bank might not reach its 2008 profit target. Given the downturn in the global economy, that doesn’t surprise investors, who are keen to know when management thinks the crisis will end.
Di Iorio, careful to maintain the credibility the bank has fought hard to achieve, says the future remains uncertain, but Deutsche wants to be ready to pounce when the economy turns around. “Our economists believe we are at the beginning of the end phase,” says Di Iorio, 64, who took home E3.5 million in salary and bonuses last year. “It is uncertain, and therefore we need to respect that uncertainty and be careful we don’t either jump too soon or not move fast enough.”
British Land Co.
U.K. Property Developer Gives Investors All the Details
British Land Co. has come a long way since 2002, when management won a highly publicized battle with activist shareholder Laxey Partners, which had attempted to force the London-based property developer to buy back shares. “It was quite clear that the shares were undervalued, and much of it was an absence of understanding of the implicit strengths of the business,” says Graham Roberts, who became chief financial officer in March 2002.
The incident made management realize they had not been communicating effectively with shareholders. Roberts says that at the time, British Land shares had traded as low as £5 (then worth $7.10), but the price began to rise as the company became more transparent, and shares traded just above £17 when it became a real estate investment trust in January 2007. “Some of that was due to the fact that we converted to REIT status, but part of it was that property had reached a peak level of pricing,” he says.
Roberts notes that British Land realized the importance of furnishing investors with as much information as possible. “We moved to quarterly reporting, but more important, we give very detailed analysis of lease lengths, of the occupancy levels, of how the valuations work, of our debt interest costs, the maturity of our debt, the overall position of the assets and liabilities in a way which allows granular understanding on the part of investors as to the strengths of our business,” says Roberts, 49, who earned £642,360 in total compensation in fiscal 2007, which ended March 31.
Investors are impressed by the change in management’s attitude. “Their disclosure and communication was way below standards,” says one money manager. In the years since, “that has all changed. Disclosure is excellent. On a strategic level they are clear about what they plan to do,” this shareholder says.
Roche Holding
Swiss DrugMaker Shifts Focus to Its Core Business
Shortly after Erich Hunziker took over as chief financial officer of Swiss health care group Roche Holding in 2001, he commissioned a survey of investors to see what they thought about the company. The feedback was not encouraging. “Roche was not seen as a big winner in the industry,” he says.
That’s putting it mildly. The Basel-based com-pany that investors dubbed “the bank” because it made more -money from its investments than from its core pharmaceuticals business reported a net loss of Sf4 billion in 2002 (then worth $2.9 billion) and invested only Sf3.5 billion in research and development, a relatively low figure for such a research-driven industry. Five years later, after management implemented structural changes — including reduced operating costs through the use of fewer manufacturing facilities and a much bigger R&D allocation (Sf8.4 billion in 2007) — Roche reported net profit of Sf11.4 billion, up 23.9 percent from 2006, and earnings per share of Sf11.85, up 20.2 -percent.
Roche also took steps to bolster its shareholder relations. The investor survey, which is conducted on an annual basis, showed he had plenty of work to do. “Transparency and reliability were at the top of the list of all potential or existing investors,” says Hunziker, 54, who earned Sf4 million in salary and bonuses last year. He assembled a new investor relations team and began publishing more-detailed company reports.
Given that Roche is restricted by its shareholder structure from buying back shares, the company is still doing a good job of returning value by boosting its share price, says John Sherman, a health care analyst with Baltimore-based T. Rowe Price Associates; Roche shares shot up 65.7 percent since Hunziker took office in August 2001, through mid-June. Sherman says the company is much more accessible than in the past. “They are fairly transparent, and there is good access to management,” he says. “They are not specific in communicating targets and tend to be conservative, so they are usually better than their guidance.”
Royal KPN
Dutch Telecom Firm Takes a Back-to-Growth Approach
When A.J. (Ad) Scheepbouwer meets with investors these days, he usually has good news to share. -That’s a refreshing change from when he joined Royal KPN as chief executive officer in November 2001. The former Dutch telecommunications monopoly was wrestling with losses in its German mobile phone business and weak market share in its domestic mobile phone operations.
All that’s in the past; the company, headquartered in the Hague, is growing again. KPN is the top mobile phone services provider in the Netherlands, with 17.9 million subscribers (51.2 percent of the market). Scheep-bouwer oversaw the restructuring of the company’s German mobile phone business, E-Plus Mobilfunk, so that it became profitable again, and allocated more resources for broadband and Internet television in the Netherlands to attract new subscribers. The number of customers subscribing to KPN’s digital TV service grew by 11.3 percent in the first quarter, to more than 553,000, and last month the company launched Europe’s first national mobile TV network. KPN’s year-over-year income rose 22.1 percent in the first quarter, to E3.6 billion ($5.7 billion), and earnings per share increased 18.8 percent, to E0.19.
“I used to talk about how to avoid going broke,” says Scheepbouwer, 64, who earned E4.48 -million in salary and bonuses last year. “Now I talk about how to get back to growth, how much money we distribute to shareholders and why.”
KPN has been distributing a lot to shareholders lately. Over the past four years, the company has returned E1 billion to E1.5 billion a year to investors through share buybacks. That is in addition to dividend payouts, which have risen from E0.35 per share in 2004 to E0.54 per share last year.
“A few years ago this company was perceived as being in a real quandary, but they brought in an aggressive CEO who really delivered,” says Edward Field, a fund manager at M&G Investment Management in London. “It’s really about what they did, not what they say.”
Lafarge
Acquisitions Help French Cement maker Boost Returns
A series of key acquisitions stretching back to 1999 have -transformed Lafarge from a French industrial group to the world’s biggest producer of cement. In January the Paris--based company completed the purchase of the cement unit of Egyptian building products manufacturer Orascom Construction Industries for E8.8 billion ($12.9 billion). The deal gives Lafarge access not only to new markets in the Middle East but also to a new major shareholder: Nassef Sawiris, OCI’s chief executive officer and majority shareholder.
Sawiris received 22.5 million new shares of Lafarge, which he agreed to hold for ten years. He now holds 11.4 percent of the French company. Sawiris and three representatives of Lafarge’s other major shareholder, Groupe Bruxelles Lambert (which holds 18.7 percent), were awarded seats on Lafarge’s board of directors in December and will exert direct influence on company strategy.
How will chief financial officer Jean-Jacques Gauthier and his colleagues balance the interests of these shareholders, a second group of 14 institutions that each hold more than 1 percent of the com-pany and other investors?
“The only answer is performance,” he says, adding that all investors are treated equally. “As long as management is performing well and maintaining a constant dialogue with the market, usually there is no need for activism,” declares Gauthier, 49, who declined to disclose his annual compensation.
Despite the slowdown in the U.S. and European economies, Lafarge’s net income rose 49 percent year over year in the first quarter, to E150 million, after adjustments to exclude the impact of one-off disposals. Operating income soared 48.4 percent, to E512 million, with earnings from emerging markets accounting for 70 percent of the total.
Daniele Patti of RCM – Allianz Global Investors in Frankfurt says management changes in recent years, including the appointment of Gauthier as CFO in 2001 and Bruno Lafont as CEO in 2006, have brought fresh ideas to the company and a commitment to growth. “One important step was to increase exposure to emerging markets,” says Patti. “It’s important because the economic growth in these markets means they need infrastructure, and that leads to higher cement sales.”
