This content is from: Home

Pleasing the Base

As activists take aim at ever-bigger targets, European companies amplify their efforts to keep investors satisfied. Here are the companies that have shareholders smiling.

As one of the world’s biggest hoteliers, Accor should know a thing or two about presentation. But the French company has stepped up its investor relations efforts ever since Colony Capital, a Los Angeles–based investment firm focused on real estate, sank E1 billion ($1.3 billion) into the group’s debt in May 2005 and took two seats on its 17-strong board. The move has had a galvanizing effect. Shares in Accor — home to chains including Sofitel, Novotel and Motel 6 — have nearly doubled since then, as the company has replaced management, shed noncore assets and restructured its huge property portfolio.

CEO Gilles Pélisson has been careful to keep his long-term shareholders close amid this strategic overhaul. In addition to hosting a special investor event for the company’s voucher business — the lesser-known of Accor’s two core operations — the investor relations team has organized site visits to new hotels and facilities run by Lenôtre, its high-end catering arm.

“We like to show investors the back of the house,” says Pélisson, 50, who returned to the company as CEO in January 2006, after spells at Bouygues Telecom, Suez and Euro Disney. “By meeting people actually running the businesses, they get a sense of our depth of talent.”

And not only that. After the event to spotlight the voucher business, held on two days in Paris in June 2006, valuations of the division — which manages luncheon, groceries and childcare vouchers for about 370,000 companies and public institutions worldwide — moved from approximately E2.5 billion to about E5.5 billion, according to most sum-of-the-parts estimates today. “Some investors, particularly in the U.S., where no meal-ticket system exists, had been calling for us to divest it,” says Pélisson. “Now that they’ve been made to focus on the value, we’re getting much more credit for it.”

Strategies like this have set Accor apart. Leading European fund managers rate the French hotelier as the best company in the Leisure & Hotels sector for looking after the needs and interests of its shareholders, according to an exclusive survey by Institutional Investor.

Companies have to work harder to please shareholders, who are more likely to challenge CEOs on strategy and short-term financial performance than in years past. In recognition of this trend, II again reached out to the world’s biggest investors for their opinions about which companies best relate to — and perform for — the investment community. Our second annual ranking of Europe’s Most Shareholder-Friendly Companies in 31 industry sectors was tallied from the votes of more than 700 analysts and portfolio managers at more than 200 institutions that have in excess of $3 trillion invested in European stocks. Among the factors these respondents were asked to consider when voicing their opinions were companies’ governance policies and investor relations efforts. (The top-rated companies in 31 sectors appear in the table on page 43; the complete ranking and methodology can be found on our Web site,

Keeping investors happy is no easy task. The proliferation of hedge funds, often with very different investment horizons, means that shareholder bases are now more difficult to read. Activist funds abound, and historically long-only funds are shortening their average holding times to outperform a bullish market.

“Investment horizons used to be three to five years; now it’s more like nine to 12 months,” observes Oliver Maier, 41, head of IR at Fresenius Medical Care, the German dialysis provider that tops our ranking in the Medical Technologies & Services category. “Times have changed.”

And so have the challenges that executives must contend with. “It’s becoming more and more difficult to ‘screen out’ swings in the share price caused by short-term momentum players, people simply speculating,” says Pélisson. “You really need to focus on the substance of what you’re trying to achieve on a long-term basis.”

These days executives cannot take shareholders’ support for granted. Recent attacks on ABN Amro, Cadbury Schweppes and Vodafone, among others, show that companies can be blindsided by rebels using small stakes to make very big demands. Meanwhile, institutional investors, which have tended to prefer discreet discussions with managers to public advocacy, are now learning that “a more muscular approach can pay dividends,” says Michelle Edkins, managing director of governance service with London-based Governance for Owners Group, a shareholder rights organization.

That is why executives are becoming more direct with their IR activities, taking the story straight to the buy side and cutting out intermediaries as much as possible. As at Accor, the more time spent talking directly to investors, the stronger the relationship and the greater the chance they will get “the message you want to send, rather than one that’s been interpreted for you,” says Andrew Higginson, 49, CFO of Tesco, the British retail chain that tops the table in the Retailing/Food & Drug Chains sector.

Paul Pindar, chief executive of the U.K. outsourcing group Capita, says he doesn’t worry about increased shareholder activism. “As long as investors believe you are doing a reasonably good job for them, they’ve got no reason to interfere or cast judgment on the way you should be doing things,” says the 47-year-old CEO. But he cautions against overreacting to the short-term demands of some investors and insists that companies. “You need to take a long-term view,” he says. “Ten years on, is the share price significantly higher than it was ten years ago? That’s the ultimate measure of whether you’ve created value.”

Companies recognize that sell-side analysts can be handy mouthpieces at times, but they are no longer vital conduits to the kind of investors businesses want: Increasingly, companies see that analysts are catering to commission-generating proprietary trading departments and hedge funds. Meanwhile, institutions have built up their own research capabilities, investing in high-quality analysts making their own decisions, rather than relying on what their brokers tell them.

As a result, company executives like Guy Elliott, finance director at Rio Tinto, our top-ranked company in the Metals & Mining category, are rationing their time with the sell side. Elliott limits his to twice-yearly get-togethers in London and Sydney, where the dual-listed company has a big shareholder base. For the rest of the year, he sees only the buy side.

“We like to hear how we’re doing directly from shareholders, rather than through the prism of sell-side analysts,” says Elliott, 50.

That hands-on strategy plays well with investors. At an investor conference sponsored by UBS last month, for example, Elliott “really spelled out what Rio was doing with its capital management and dividend policy over the next few years,” says one voter. “None of the other mining companies really do that.”

With that closer relationship comes a better sense of what investors want. Often it means staffing IR teams with ex-analysts and company insiders, rather than PR or communications professionals. At ASML Holding, the Dutch manufacturer of semiconductor equipment that ranks No. 1 in Technology/Semiconductors, for example, director of European IR Franki D’Hoore — now in his 20th year with the company — led the European sales team before joining IR in 2000. The other members of ASML’s five-strong team have similar backgrounds. “We increasingly see highly specialized investor groups, with Ph.D.s in electrical engineering, sitting across the table,” says CFO Peter Wennink, 50, who joined ASML from Deloitte Touche Tohmatsu in 1999. “If they want to dive deep into our technology, Franki’s knowledge is superior to mine. I talk to investors at least every couple of days, constantly tuning our messaging, but these guys in IR are the front-runners, really making the market.”

Strategies like these pay off in the event of choppy performance, when executives can rely on the relationships they have cultivated with their long-term holders. Take Reuters Group, the 155-year-old news and financial information outfit, which tops our ranking in the Media category. Even with a recent share price spike as a result of a takeover offer from Thomson Corp., the Canadian conglomerate, Reuters’s stock is still down some 43 percent from its 2000 highs. Shareholders have had to be patient, says finance director David Grigson, as the company suffered intense competition in its core financial data division from upstart Bloomberg amid a steep industry downturn, post-9/11. It was not until July 2005 that the company hit investors with its long-awaited growth strategy, Core Plus, which involved expanding into high-speed electronic platforms and new markets like China and India, while maintaining a reliance on existing core businesses. But even then, profitability would have to wait, as the company digested about £170 million ($302 million) in restructuring costs, starting in 2006. “We’ve needed friends onside at times, so we’ve worked hard to get the story out there,” says Grigson, who joined Reuters in 2000. “We’ve tried to be as responsive as possible, trying to understand in advance what their needs might be.”

Reuters is one of a growing number of companies that get unvarnished views on the effectiveness of their messaging by using third-party consultants — Makinson Cowell, Citigate Dewe Rogerson and Taylor Rafferty, to name a few — to canvass the buy side at least once a year. Qualitative assessments of strategy, management performance and communications are coupled with quantitative research on share-price drivers and changing ownership patterns. “What’s important is what investors are actually thinking, rather than what we think they’re thinking,” says Grigson, 52.

Traditional long-only managers are not the only shareholders in these samples: These days, it pays to take a more pragmatic approach to shorter-term investors. Where once they were privately demonized — or worse, publicly shunned — they are now well worth getting to know, says Maier at Fresenius Medical Care. Not only do hedge funds stimulate liquidity in a stock, “they do things that you can make use of, as a company. If you’re selling a noncore business, for example, you need to be talking to them.”

Maier points out that Deutsche Börse’s share price has more than doubled since hedge funds derailed its takeover offer for the London Stock Exchange two years ago. “In the past, German CEOs didn’t want to be grilled by a 20-year-old guy in London telling them what to do. Now we go on the road to learn something,” he says. Hedge funds and activist investors “tell you what’s important for them. If you don’t listen, don’t be amazed if they buy 5 percent and then start making life a misery for you.”

Getting close to long-term investors also pays off if trouble rears its head through minority holders’ trying to hijack corporate strategy. “The better you know your shareholders and what their long- or short-term objectives are, then the better you’re able to judge the merits and also the support for a demand by a small shareholder constituency,” says Jacques Schraven, 65, a former deputy chairman of Anglo-Dutch Corus Group steel group and now chairman of Brussels-based Ealic, the European Association of Listed Companies.

But at the same time, the most shareholder-friendly companies will not allow themselves to be second-guessed by minority activists. “We take every investor’s opinion seriously, but we can’t be all things to all people,” says Harry Roels, CEO of RWE, the German power giant, which tops our ranking in the Utilities category. “It’s our role to set a strategy, to communicate that strategy and to explain it as best we can. We have a very long-term philosophy; we’re not managing for the next quarter.”

The ranking was compiled by Institutional Investor under the guidance of Director of Research Operations Sathya Rajavelu and Senior Editor Jane B. Kenney.


The German Utility pleases investors by restoring its focus on electricity and gas.

Harry Roels has led a quiet revolution since joining RWE, the German utility, as CEO in February 2003. At the time, the Essen-based company was limping along after a huge spending spree that included Thames Water Utilities and Innogy Holdings of the U.K. and American Water Works in the U.S. Today, having sold off the British water subsidiary at a steep price and preparing to offload American Water through an IPO, RWE is a leaner, much less indebted operation, with equity capital up about 60 percent since 2003 and a cost base that is greatly reduced. Earlier this year, on the back of net profits up 72 percent after disposals and tax gains in 2006, the company almost doubled its payout ratio, to 80 percent.

The company’s share price tells its own story, rising from about E20 in 2003 to nearly E80 today. “Investors never liked the combination of electricty and water,” says one London-based hedge fund manager. “Now it’s a pure-play electricity and gas company.”

Now that the company is better shape — a “growth-and-yield stock,” in the words of one investor — Roels, 59, has won praise for vowing not to fritter away shareholders’ money on value-destroying deals. “A lot of share prices in the utility universe are stretched at the moment,” he says. “I don’t know why you’d invest one euro in an asset worth only 90 cents, and with a takeover premium too. You’re transferring value to the shareholders of the target, rather than your own.”



Roddy Child-Villiers, head of investor relations at Nestlé, acknowledges that the Swiss food giant provides much less access to its executive management than do many of its peers. Aside from a two-day seminar every summer at the company’s headquarters in Vevey, near Geneva, investors’ interaction with the CEO and CFO is limited to the occasional lunch or one-off event, typically once or twice a year. “Managers should spend most of their time out there in the business, driving strategic values and messages,” he says.

Given that reduced access, Nestlé’s five-strong investor relations team has to be inventive to stand out from the crowd. One example is its pro-active management of the consensus-gathering process. Every quarter the company sends out an official profit-and-loss statement to about 50 analysts, asking them to fill in their estimates according to a fixed template. When the data come back, the team cleans them up — stripping out “wonky numbers” — and then recirculates them to analysts on both the buy and the sell side, without seeking to steer the consensus. It is a significant but well-received effort. “You can see the spreadsheet populated by all the metrics you care about,” says Stuart Price, a fund manager at Pioneer Investments in Dublin.

Nestlé also closely tracks movements among its shareholders, particularly those involving U.S. holders, who now represent about 25 percent of the investor base, up from 10 percent five years ago. Even as it targets underweight institutions with a propensity to buy, the IR team keeps close tabs on why individual shareholders have bought and sold over the previous six months. That way the company can nip problems in the bud. Child-Villiers, 44, has had to pour cold water on market speculation that Nestlé might sell its 75 percent stake in Alcon, a U.S. eye care company that the Swiss regard as a core holding. “People buying something for the wrong reason or with the wrong expectation are unlikely to be happy investors,” he says. “It’s important that buyers really understand what our strategy is and what our ambitions are.”


British retailer carefully paves way for its U.S. expansion.

North America has been an unhappy hunting ground for a succession of European retailers. Holland’s Royal Ahold and the U.K.’s J. Sainsbury and Marks & Spencer Group have all struggled, dwarfed by the market leader, Wal-Mart Stores. So when Tesco started talking up its U.S. expansion strategy earlier this year, CFO Andrew Higginson was quick to reassure investors that the company would not sink endless amounts of capital into the venture.

Tesco — the U.K.’s dominant retailer, with operations in 12 other countries — will invest £250 million ($500 million) each year for the next three years in developing a network of 200 Fresh & Easy convenience stores in the southwestern U.S. Start-up losses this year will be big, at about £65 million, but the network should be profitable by year three. If not, Tesco is prepared to beat a retreat. “There are three possible scenarios: a roaring success, a complete disaster or, more likely, somewhere in the middle,” says Higginson, 49, who joined the company as CFO in 1997.

Tesco told a similar story in 1999, when it set bold targets for the first wave of its international expansion plans in a presentation to analysts, saying profits from overseas — then mostly in central Europe, South Korea and Thailand — would range from £140 million to £160 million within three years, yielding returns on investment of 9 to 10 percent. The company hit those targets in April 2003. “Tesco manages expectations well,” says Richard Hunter, head of U.K. equities at Bristol-based Hargreaves Lansdown Stockbrokers. “They’ve always been very clear on the upside and the downside.”


U.K. Group focuses on managing the business, not the market.

One glance at Paul Pindar’s spartan office confirms that the CEO of Capita Group is no fan of clutter. A framed, signed team photo of his beloved Leeds United is the only item on the walls, and there are no bookshelves groaning with management tomes.

The same no-frills philosophy applies to IR at the London-based business process outsourcing specialist. Capita has no dedicated IR resource, leaving many of the nuts-and-bolts tasks to its joint corporate brokerage houses, Citigroup and Deutsche Bank. Shona Nichols, group marketing director, takes up the rest, assisted by CFO Gordon Hurst, where necessary. “We try and manage the time we put into IR quite carefully,” says Pindar, 47, who joined the company in 1987 from private equity player 3i, where he advised Capita on its management buy-out. “There has to be a balance between talking and doing.”

To build up the company’s U.S. investor base in the mid-’90s, for example, Pindar and former chairman Rodney Aldridge used to take two weeks out of the year to tour North America. Now that U.S. investors are established at about 12 percent of shareholders, the company limits its roadshows to a couple of days at most, after interim and final results; Pindar himself hasn’t visited investors in Europe or the U.S. in two years, preferring to focus on core shareholders in the U.K. “We have to be pragmatic about it,” he says. “I’ve got shareholders two miles from our offices that own more than that, and I can go and see them in an hour.”

Investors do not mind the hands-off approach. Christian Diebitsch, who keeps Capita close to a 10 percent position limit in his £45 million ($90 million) European fund at W.P. Stewart Asset Management in London, has not had a one-on-one with the company in more than two years, but he is not worried. A slick IR program is a sign of “extravagance,” he says; he would prefer management to focus on maintaining Capita as one of the best-performing stocks in Europe, delivering a 250-fold return since floating in 1989. “Who needs lunches? If I have a problem, I call up the CFO.”