The VW meeting and shareholder democracy

On May 8, 2006, Mr. Plender published the following article in the Financial Times:
“The voting at last week’s annual meeting of Volkswagen was faintly redolent of democratic process in Saddam Hussein’s Iraq. Despite vocal criticism of Ferdinand Piëch, the German carmaker’s chairman, he was supported by a vote of 98.2 per cent. Chief among his detractors were fund managers DWS, Deka and Hermes, who together had about 5m shares. Yet only 2.9m out of 163.3m shares were voted against him.
The issues were not trivial. Mr Piëch upset many shareholders by voting with the unions to appoint a new personnel director against the wishes of Bernd Pischetsrieder, chief executive, who is trying to implement a tough cost-cutting programme. He also publicly undermined Mr Pischetsrieder by questioning whether his contract should be renewed.“

In the following, Mr. Plender guessed that “this bizarre outcome” – the clear majority for Mr. Piech – and the thin voting turnout at the VW meeting was due to the following reasons:
a) the complexity of the chains of intermediaries that separate the company from the ultimate beneficial owners;
b) fund managers’ instructions to intermediaries such as custodians are often not properly fulfilled;
c) many investors are reluctant to vote where there are share blocking requirements preventing shares being traded for a period before the annual meeting;
d) cross-border voting is difficult;
e) there is a multiplication of votes by virtue of a deficient administration of votes by the banks.

Mr. Plender may think about clear majorities what he wants; in non-contested situations at corporate meetings, they are common. However, with all due respect, Mr. Plender’s guesses are not accurate. While, generally speaking, there are problems with lost votes in the chain of intermediaries, in  particular in the UK (see the Myners report of 2004), the issue with Volkswagen is a different one.

ad a) Volkswagen is an issuer of bearer shares. The problem that Mr. Plender observed with the registered shares in the UK and elsewhere, which is that the intermediary is registered as a shareholder while the beneficial owner ist not, does not apply to bearer share issuers. This is due to the fact that under a bearer share regime the holder of a bank account in which s/he holds
shares of a company is deemed the shareholder. Under a bearer share regime, a shareholder is entitled to vote if his/her bank certifies his shareholding. In theory, no forwarding within a chain of intermediaries is necessary. Every shareholder may send / hand over the bank certificate to
the company with his/her proxy and directions of how to exercise his voting rights.

ad b) Mr. Plender mentioned three funds (DWS, DEKA, Hermes) which were apparently criticizing Mr. Piech. As these three fund companies administer a bundle of funds, it is not entirely certain that all fund managers of these fund families voted against Mr. Piech. Further, often, a fund manager mentions his disapproval but abstains from voting, in order to avoid a negative impact on the stock quote. Alternatively, the fund’s own proxy voting administration may have been deficient. While German law strongly encourages funds to vote, fund companies are reluctant to spend money on the voting process.

ad c) German law does not require shareblocking.

ad d) I agree.

ad e) Having been involved with app. 150 shareholder meetings myself, I have not observed the multiplication of votes within the national system in Germany. Further, this phenomenon is highly unlikely given that banks are liable to the company for the issuance of wrong certificates (see above). Finally, the peculiarities of German company law and the low threshold pursuant to which German shareholders can contest a meeting’s decision prompt the banks to act extremely diligently and carefully when issuing certificates.

I believe, Mr. Plender observed a combination of factors.

1st: Pursuant to the proxy voting policy of most American and some British funds, there is discretion vested into fund managers whether to exercise voting rights in companies which are incorporated abroad. The German rules for funds do not apply to these investors.

Consequently, as voting is expensive, most foreign fund managers refrain from voting. Given that the share of Anglo-American investment in most DAX30-companies is high (and still increasing), the passivity of institutional investors results in significantly lower turnouts.

2nd: Specifically in the case of Volkswagen AG, there is an anachronistic law in place, dating back to the 1960s, when Volkswagen was a state-owned company. Pursuant to this law, the proxy must be issued in writing. While DAX-100 companies generelly rely on internet voting, in the case of Volkswagen, a fund manager must sign a proxy in writing and send this proxy to the company. This is a burdensome process, but unique for Volkswagen AG. The law itself is currently being challenged by the European Commission. It may be that some of the proxies issued by the three funds in question did not fulfill these burdensome formal requirements.

3rd: The use of the words „high turnout“ and „low turnout“ requires reconsideration. I have analyzed the turn-outs at US shareholder meetings which is regularly at app. 80-90%. However, in many cases so called „broker non-votes“ influence the turn-out by 10-20%. These are proxies voted by brokers without any permission or direction by the shareholder and these votes are typically voted in favor of management when deciding upon day-to-day-issues. Substracting these votes from the overall turnout reveals that, in many cases, the „real“ turnout at US meetings is more something like 60-70%, besides participation of international investors in the voting process (which hardly takes place in continental Europe).

Having said this, I nevertheless strongly support the smoothing of the chain of intermediaries in Europe (for different reasons than expressed in Mr. Plender’s article).

For further information, see here.

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