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.

Aktiengesellschaft Ausländisches Gesellschaftsrecht Hauptversammlung

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